Moody’s Investors Service downgraded the ratings of The Bank of N.T. Butterfield & Son Limited (Butterfield). Butterfield’s standalone bank financial strength rating/baseline credit assessment was downgraded to D+/baa3 from C-/baa2.

The bank’s long-term deposit rating was downgraded to A3 from A2 and its short-term rating to Prime-2 from Prime-1. The rating outlook is stable. This concludes the review for downgrade that was initiated on 3 April 2013.

The downgrade reflects Butterfield’s still-high level of nonperforming assets (NPAs) and the limited prospect of it improving in the near- to medium-term given Bermuda’s ongoing recession. The high level of NPAs is the result of the bank’s large concentration in Bermuda real estate and its sizable exposures to single credits. Moody’s added that the downgrade reflects Butterfield’s relatively weak profitability, which will likely remain constrained because of low interest rates and the possibility of further credit costs.

Despite these challenges, Moody’s said that Butterfield’s stable outlook reflects its strong capital position, which supports creditors and serves to mitigate some of the risk related to the bank’s concentrations and its weak asset quality. However, Moody’s does not expect significant improvement in Butterfield’s capital position given its limited ability to generate capital internally.

Butterfield’s deposit and debt ratings benefit from systemic support, and incorporate a three-notch lift, based on the Government of Bermuda’s Aa3 government bond rating. Moody’s believes that Butterfield enjoys a very high probability of systemic support, a view that was validated by the Government’s announcement in 2009 that it would guarantee Butterfield’s $200 million preferred stock issue and purchase any preferred stock that was not placed with investors.

The downgrade of Butterfield’s government-guaranteed preferred stock rating from Aa2 (hyb) to Aa3 (hyb) is directly linked to the downgrade of the Bermuda government’s bond rating from Aa2 to Aa3 on 16 May 2013. The preferred stock rating outlook is negative, consistent with the negative outlook on the Bermuda government’s bond rating.

The principal methodology used in this rating was Moody’s Consolidated Global Bank Rating Methodology published in June 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

The Bank of N.T. Butterfield & Son Limited, headquartered in Hamilton, Bermuda, reported assets of $8.9 billion at 31 March 2013.a