Butterfield Bank’s credit rating has been upgraded by Fitch Ratings.

The New York-based rating agency said today that it had raised the bank’s “viability rating” to “bbb” from “bbb-” after its review of the bank.

Fitch has also affirmed Butterfield’s support-driven long-term issuer default rating of “BBB”. The rating outlook remains stable.

“Today’s upgrade reflects Butterfield’s demonstrated and sustainable improvement in core profitability, execution of stated strategic objectives, and continued above-average capital levels,” Fitch stated in its commentary on the upgrade.

“The VR also reflects Fitch’s positive view on the company’s liquid balance sheet and strong market position in Bermuda and the Cayman Islands.

“Conversely, product and geographic concentration in Bermuda and concentration in the loan portfolio constrain the VR.”

Fitch noted positive trends in the bank’s financial results, including growth in fee-based business and net interest income and a decline on one-off expenses.

“Return on average assets was 1.07 per cent for 2016, which is in line with similarly-rated peers, and up 29 basis points from the prior year,” Fitch said.

Fitch also had a positive view on changes to the bank’s capital structure stemming from its historic initial public offering of shares on the New York Stock Exchange last September.

The proceeds of the IPO were used to redeem the 8 per cent preferred shares, resulting in a saving of $16 million in annual dividend payments and guarantee expenses.

“Further, the common share offering improved the bank’s access to capital and provided US secondary market liquidity for BNTB’s largest shareholder, The Carlyle Group, a private-equity firm, to exit its 23 per cent position,” Fitch stated.

“From a creditor’s perspective, Carlyle’s exit should support a more long-term-oriented investor base, which is more favourable in our view.

“The bank continues to maintain above-average capital levels on a risk-weighted basis, which Fitch views positively and supports the VR at its new level. As of the first quarter, BNTB’s Fitch core capital-to-risk weighted assets ratio was 15.9 per cent, up from 13.1 per cent in the prior year period. BNTB’s revenue and loan portfolio are concentrated in Bermuda. As such, Fitch expects BNTB to operate with higher capital than similarly-rated peers.”

Fitch also views balance sheet liquidity as a strength to the rating. Butterfield “operates with a high level of cash and securities at 65 per cent of total assets in the first quarter of this year, and a low loan-to-deposit ratio of 36 per cent”. Also supporting the rating was Fitch’s belief that the Bermuda Government would step in to support Butterfield if its aid was needed — as it did with the government guarantee of the $200 million preference share issuance in 2009.

Fitch commented: “The Government of Bermuda passed resolution legislation in February 2016 that has weakened the sovereign’s propensity to provide support. In Fitch’s view, although the resolution legislation has weakened support, it has not eliminated it.

“Fitch believes the government continues to maintain a strong willingness to support the country’s banking system because BNTB’s assets are considerable when compared to the size of the Bermudian economy and contagion risk is high. A failure of a major bank could lead to rapid disruption across the financial services sector and spread to the wider economy.

“As such, Butterfield’s support rating of ‘2’ indicates a ‘high probability’ of external support from the sovereign.”

However, Fitch noted: “BNTB’s product and geographic concentration in Bermuda and concentration in the loan portfolio constrain the VR. The bank’s top ten commercial lending exposures account for a large percentage of total commercial loans.”