A liquid balance sheet and high capital levels has garnered the Bermuda Commercial Bank affirmation of its Long- and Short-term Issuer Default Ratings (IDRs) of ‘BBB-/F3’ and a stable rating outlook from Fitch Ratings.

It came with some concerns and a warning from the ratings agency.

The affirmation of IDRs, said Fitch, reflects the company’s liquid balance sheet and its strong capital position. The company’s unusually strong liquidity profile and capital levels have a high influence on Fitch’s investment grade rating for the bank.

Fitch said, “BCB operates with a very liquid balance sheet relative to its bank peers in Bermuda and the community bank peer group in the US.

“With average cash on hand averaging 44 percent of total assets over the last five years, Fitch views BCB’s balance sheet as sufficient to weather through a liquidity crisis, although such an event is considered unlikely.

“BCB’s capital levels, on a tangible and risk adjusted basis, continue to be strong. Fitch Core Capital relative to risk-weighted assets was approximately 25.5 percent at December 31, 2013, and much higher than most banks in Fitch’s rated universe.

“In Fitch’s view, the company should maintain high levels of capital due to BCB’s limited business diversity, large investment portfolio and large customer concentrations in its deposits base.

“Offsetting these positives, Fitch views the company’s investment securities book as high risk and concentrated. Fitch believes that further risk management enhancements related to the investment portfolio are needed to support current ratings and outlook.

“Positively, the company has made efforts to reduce its level of concentration risk in the securities portfolio. The largest 20 investment holdings account for 41 percent of the total portfolio compared to 51 percent a year earlier.

“Fitch is also concerned with the level of related party transactions at BCB, which is not considered to be in line with corporate governance best practices. Although currently not a significant rating driver or sensitivity, Fitch would view a continued increase of these transactions negatively.”

The ratings agency said the bank has been proactive in improving its non-interest revenue stream, completing two acquisitions of trust and corporate administration service companies in late 2011.

They say the strategy has resulted in a 28 percent revenue increase year-over-year. But they still believe that despite the strong momentum, BCB will face challenges to significantly grow this business given its small market share relative to its competitors on the Island.

They added, “Fitch believes the current ratings are at the higher-end of their potential range given BCB’s scale of operations and limited diversity.

“In Fitch’s view, BCB’s underlying fundamentals such as franchise value and limited business model are more reflective of a ‘bb’ range VR (Viability Rating). Thus Fitch considers BCB’s high capital and liquidity levels to offset what would otherwise suggest a sub-investment-grade rating.

“Fitch would consider a rating downgrade if average on-balance-sheet cash liquidity, as defined as cash-to-total assets, were to decline below 30 percent and/or if Fitch Core Capital-to-Risk Weighted Assets fell below 20 percent.

“Additionally, a significant increase in credit or market risks including a rise in concentrations in the securities portfolio, and/or any acquisition that results in a shift toward a riskier business mix could also result in a rating downgrade.

“BCB has a Support Rating of ‘5’ and Support Floor Rating of ‘NF’.

“In Fitch’s view, BCB is not systemically important in the local Bermuda market and, therefore, believes the probability of support is unlikely.

“IDRs and VRs do not incorporate any support for BCB.”