Butterfield Bank's preferred stock, set to be guaranteed and/or purchased by Government, could prove to be an attractive proposition to investors.

That is the view of LOM's latest Research Update on Butterfield Bank Group, which was published in the wake of Government's announcement on Friday that it would back the bank with a $200 million commitment of extra capital to help it deal with a severe economic downturn.

The bank sought extra support from Government following "stress tests" on all of Bermuda's banks carried out by the Bermuda Monetary Authority (BMA) in response to the global downturn, with the BMA requiring banks to hold an additional "capital buffer" to cope in the event of a drastic deterioration in the economy.

Meanwhile, also on Friday Butterfield Bank was placed on CreditWatch Developing with 'A-' long-term counterparty credit rating by Standard & Poor's Ratings Services, having initially been put on CreditWatch Negative last Tuesday based on concerns that the bank's securities portfolio could experience further impairment.

LOM's report found that Butterfield's capital base had declined due to a slowing economic environment combined with the significant and protracted impairment of its held-to-maturity CMO investments.

It also described the $200 million capital injection of Government-backed preference shares as a "welcome and proactive step" to strengthen the bank's balance sheet and capital position.

Furthermore, given the preliminary terms announced by Butterfield, the study estimated annual servicing costs of this preference share issue of between $15 million and $20 million, with a future four percent share dilution possible, should the bank's share price rise above the $7.01 exercise price of the warrants issued to Government.

Butterfield Bank's common shares have traditionally traded based on a four to six percent cash dividend yield, it said, but after the announced cut in the cash dividend to 16 cents per annum (with another 16 cents paid in stock), the cash yield will fall to 2.2 percent.

"Because of this lower yield and the difficulty in earnings growth going forward (due to lower credit spreads, higher cost of capital, and a recessionary environment) we would recommend that investors hold off on buying the stock," the report read.

"With unconditional Government of Bermuda backing and terms in-line with recent bank preference share issues, the forthcoming Butterfield preferred stock could prove to be an attractive investment."

It recommends investors to 'hold' the bank's stock, with the share price at $7.25 at the close of trading on the Bermuda Stock Exchange Index.

Butterfield Bank, which also released its annual results for 2008 last week, saw its profits drop by more than $140 million over the past year, due mainly to writedowns and losses in investments.

The bank's net income was $4.8 million or five cents per share for the full year ended December 31, 2008 compared to $146 million or $1.53 per share for the same period in 2007.