Butterfield Bank is to receive a $200 million commitment of extra capital from the Government to ensure that it will be well positioned to withstand a severe economic downturn.

The bank, which also announced it made a net profit of $4.8 million in 2008, stressed that its current capital levels comfortably exceeded all regulatory requirements.

It sought the extra backing from Government to ensure that it remains on a solid footing even in the case of a dramatic worsening of economic conditions.

This follows “stress tests” on all of Bermuda banks, required by financial regulator the Bermuda Monetary Authority (BMA), carried out in response to the global downturn.

As a precautionary measure, the Authority has required banks to hold an additional “capital buffer” to withstand a severe deterioration in the economy.

To achieve this heightened standard, Butterfield will issue $200 million of non-convertible preference shares to be guaranteed and/or purchased by Government.

The bank has also cut its quarterly dividend to eight cents a share.

Butterfield chairman Robert Mulderig said today: “To ensure that the bank is best prepared for the future and consistent with a recent announcement from the BMA, the board acted to enhance the bank’s capital position.

“The board believes this additional capital will enable Butterfield to deal effectively with current market conditions and take advantage of longer-term opportunities when the markets stabilise.

“We are appreciative of the Government’s support of our capital raise in a market that, even for a bank as highly rated as Butterfield, would have made it difficult to raise capital privately.”

The Bermuda Stock Exchange announced at 8.05 a.m. that trading in Butterfield Bank shares had been halted pending an announcement by the bank.

Financial regulator the Bermuda Monetary Authority (BMA) said this morning that all of Bermuda’s banks exceeded the Authority’s current capital requirements.

The BMA added that it had heightened supervision of the banking sector over the last 18 months, in response to worsening global economic conditions.

“The measures we have announced today mean that the Bermuda banking system will be ready to withstand a severe economic downturnand still be in a strong financial position,” BMA chief executive officer Matthew Elderfield said.

“This is a precautionary measure in line with the prudent and conservative approach to managing the financial crisis which has been taken by the Authority, Government and the banking sector.”

The stress tests, carried out by the banks and then independently by the BMA, simulated the impact of a substantial deterioration in the economy on the banks’ investment portfolios and lending activities.

Consequently the banks and the BMA agreed on the level of capital required to absorb the potential losses arising from a severe downturn and to still maintain high-quality, core capital of at least six percent of risk-weighted assets — a higher standard than the four percent required by UK regulators.

This high-quality capital is known as Tier 1. Butterfield said its Tier 1 capital ratio at the end of 2008 was 7.5 percent.

The slump in US housing prices impacted Butterfield last year, through the bank’s investments in securities backed by US mortgages. In 2008, the bank recorded losses and write-downs totalling $151.8 resulting the decline in value of investments. Butterfield also had unrealised losses of $50.2 million stemming from two credit support agreements provided by the bank to Butterfield Money Market Fund Ltd.

Exclusive of the residential mortgage-backed securities, the bank has total investments with a market value of $3.3 billion.

Butterfield CEO Alan Thompson said: “Like many international banks, Butterfield felt the impact of market dislocation in a portion of our investment portfolio, which led to a substantial and adverse impact on our bottom line.

“Obviously, we are disappointed that we had to recognise losses on some securities in the bank’s held to maturity investment portfolio that were investment grade when purchased, but which were deemed to have suffered ‘other than temporary impairment’ during the year.

“In the main, these securities had exposure to the US residential mortgage market. Butterfield stopped investing in such securities in 2007.”

Butterfield said Government had agreed to support the offering of preference shares by guaranteeing the principal of, and dividend payments on, the preference shares.

In addition, the Government has committed to purchase any preference shares from this offering that are not subscribed by private investors.

* Full story in tomorrow’s Royal Gazette