KBRA Affirms the Ratings for The Bank N.T. Butterfield & Son Limited

KBRA affirms the senior unsecured debt and deposit ratings of A+, the subordinated debt rating of A, and the short-term debt and deposit ratings of K1 for Hamilton, Bermuda-based The Bank of N.T. Butterfield & Son Limited (NYSE: NTB or “the bank”). The Outlook for all long-term ratings is Stable. NTB has operations in four key jurisdictions, Bermuda, Cayman, United Kingdom, and the Channel Islands.

The ratings for NTB remain underpinned by its strong financial profile, which is characterized by a liquid balance sheet (low RWA density), historically modest cost of funds, diversified stream of non-interest revenues, and solid risk-adjusted equity capitalization.

At 1Q23, cash, short-term investments, and investment securities that are backed almost entirely by the U.S. government or a government-sponsored enterprises amalgamated 60% of total assets (or 67% of total deposits).

The deposit base, while somewhat lumpy and periodically prone to large outflows due to reinsurance, captive, trust, and fund clients managing their normal repatriation or investment objectives, has been relatively stable long-term, low cost, and generally less sensitive to interest rate changes, given the underlying nature of depositors. Noninterest-bearing deposits traditionally represent 20% of total deposits (24% at 1Q23).

Earnings performance – propelled by substantial noninterest income contribution – has been solid for an extended period, especially measured on a risk adjusted basis (in the denominator using RWA, as defined by the bank regulators).

The improved NIM in recent quarters, off the cyclical low in 1Q22, exhibits performance consistent with bank’s asset interest rate risk profile, which includes a sizeable portion of short-term investments and variable rate loans (that collectively reprice with no or minimal lag), and a deposit base with the characteristics described above. Rising yields on earning assets, notably shorter-term investments and loans, have thus far outpaced the steady, yet measured rise in the cost of deposit funding. Going forward, however, KBRA anticipates further increases in deposit cost and potentially deposit volatility, given the gap between the absolute level of short-term interest rates in countries where NTB’s deposits costs are benchmarked (U.S and U.K) and its own cost of deposits; competing high quality investments in a like currency are prevalent (U.S. T-bills and notes, U.K. Gilts). As a result, margin expansion could be hindered, but this ultimately depends on whether the deposit base becomes more responsive to the level of interest rates than has historically been the case.

KBRA believes NTB is well positioned to manage through a higher level of cost of deposit funding, principally because of the large base of non-interest income and significant asset repricing elasticity; the bank’s capacity to absorb any unexpected deposit outflows remains healthy. NTB’s policy is to maintain cash and short-term investments equivalent to at least 20% of total deposits. The percentage at 1Q23 was 21%.

Risk-adjusted capital, as measured by the CET1 ratio, continues to be robust, registering 22.1%, as of 1Q23. Adjusted for current unrealized MTM losses on both the AFS and HTM portfolios, which is due to higher interest rates, results in a materially lower CET1 ratio. Prudently, in KBRA’s view, shareholder distributions (common dividends and share repurchase) were meaningfully lower in 2022. KBRA believes capital accretion will continue, especially if the investment portfolio remains under further negative MTM pressure.

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Methodologies

Financial Institutions: Bank & Bank Holding Company Global Rating Methodology

ESG Global Rating Methodology

Disclosures

Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

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