Butterfield Bank’s increased interest rates on loans by half a percentage point comes with a warning that more increases are likely to come soon.

The bank absorbed a third of the 75-basis-point increase in the target range of the US federal funds rate in its most recent action, but another increase from Butterfield may come into effect next month.

A discussion of the rates was a part of Butterfield’s second-quarter earnings call with analysts last week.

The bank used the occasion to express optimism for the return of Bermuda tourism and the Bermuda economy, even as they anticipated the Fed’s fourth 2022 rate hike the following day (last Wednesday).

The extraordinary recent Federal Reserve action on interest rates, with more expected before the end of the year, is an attempt to quell rising inflation.

Michael Collins, the bank’s chairman and chief executive officer, told analysts: “We have continued to benefit from rising interest rates, disciplined expense management and increased non-interest earnings. This resulted in strong net income and earnings per share growth as well as a very strong quarterly return on tangible common equity.”

Craig Bridgewater, the group chief financial officer, told participants from Wells Fargo, Raymond James and KBW: “We've passed on 100 basis points to the Bermuda base rate. So, we did nothing in March. We increased by 50 basis points in May. So essentially, that will become effective … in August.

“We had an increase of 50 basis points in June when the Fed went 75 basis points. So, that will come more on line in September. That's kind of how we're seeing those rate adjustments becoming effective.

“So we would expect in Q3 that we will have, I guess, a higher velocity of net interest income, particularly when it comes to the Bermuda residential book.”

Michael Schrum, president and group chief risk officer, added: “Obviously we are seeing more demand for fixed rates. I think customers are wanting to protect our cashflows. And as we sit here today, probably 20 per cent, 22 per cent of the resi (residential) loan book is fixed-rate three to five years, which is a good outcome.

“We need more fixed-rate assets anyway. And obviously customers are reacting appropriately, I think, to also the velocity of rate increases in the market.”

Separately, the bank said the change in the US federal funds rate has a significant impact on market interest rates and the cost of funding for the banking industry.

The change to the base rate applies to Bermuda dollar residential mortgages, consumer loans, corporate loans and USD loans.

The rate increase on loans took effect on Monday. The rate increase for existing Bermuda residential mortgages is effective 90 days later.

Fixed-term deposit rates have also been increased this year as market rates have increased.

But Butterfield’s changes are in no way keeping pace with the increases from the Fed, since even next month’s increase is expected to be half a percentage point to the Bermuda base rate.

But total adjustments by the US central bank included increases in March (25 basis points), May (50 basis points), June (75 basis points) and July (75 basis points).

Meanwhile, during last week’s earnings call, Mr Collins expressed confidence that tourism and economic activity was returning to Butterfield’s core markets, and that the bank was well positioned to benefit from a post-pandemic recovery.

Mr Collins said: “Bermuda: I'd say GDP is sort of flat to a little bit up. But I would say, sort of anecdotally, the tourism season is going really well.

“I mean Hamilton Princess is completely booked. There are tonnes of people around. Forty per cent less air capacity from pre-pandemic. So, it's a bit harder to get here, but generally, the economy is doing OK. It's kind of holding its own. Cayman continues to grow — really good GDP growth.

“In Bermuda, in terms of housing costs, rents are maybe up 20 per cent or 30 per cent, so quite a bit. Housing is up as well. But probably sort of upper single digits.

“In Cayman, the economy is really growing. Population is increasing, housing costs are really sort of up 30 per cent to 40 per cent. So that, I would say, came into a really high-growth market. It's actually the low season — summer is the low season for tourism, but the economy continues to grow really well, and that's looking really good for us.

“Channel Islands is extremely well run, like Cayman, no national debt. They’re not really tourist economies. It's much more sort of international business, funds, trust, so sort of corporate business, but the economy is pretty good.

“GDP is growing in both Guernsey and Jersey. Housing costs are probably not increasing dramatically, but did so during the pandemic. Across the board, Bermuda is probably sort of the slowest growing economy.

“But Cayman is booming and the Channel Islands is going quite well.

“From a mortgage perspective, we're planning for some stress. We have a great calling programme, and we're looking at mortgages that we think maybe could run into trouble and actually being proactive in getting out in front of it in terms of talking to people and trying to help them plan how to pay us back.

“Overall, we're not seeing any sort of stress from a data perspective, but we are planning for some stress and calling our clients where we need to.”