Fitch Affirms Bermuda Commercial Bank’s L-T IDR; Revises Outlook to Stable

Fitch Ratings has affirmed the Long-and Short-term Issuer Default Ratings of Bermuda Commercial Bank at 'BBB-/F3'.

The Ratings Outlook was revised to Stable from Negative.

The affirmation of BCB's IDRs reflects the company's liquid balance sheet, which continues to be more liquid than its counterparts on the island, and the company's strong capital position with Tier 1 Capital averaging in excess of 22 percent. With that said, Fitch believes BCB's investment grade rating hinges on the company's unusually strong liquidity profile and capital levels.

BCB's Outlook revision reflects a positive trend in lower levels of concentration risk in the company's investment portfolio. The largest 20 investment holdings account for ~41 percent of the portfolio compared to ~51 percent a year earlier. Nonetheless, Fitch believes that further risk management efforts around the investment portfolio need to be developed in-house to maintain the Outlook and Ratings at current levels.

Key Rating Drivers-IDRs and VR

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 at around 40 percent of total assets, Fitch views BCB's balance sheet as sufficient to weather through a liquidity crisis, although such an event is considered unlikely at this point.

BCB's capital levels, on a tangible and risk adjusted basis, continue to be strong. Fitch Core Capital relative to risk-weighted assets was around 25 percent at Sept. 30, and much higher that its peers in Bermuda. Fitch continues to believe that due to BCB's limited business diversity, large investment portfolio and customer concentrations in its deposits profile, the company should maintain high levels of capital.

Fitch notes that management has been proactive in enhancing its non-interest revenue stream, by targeting acquisitions of trust and corporate administration service companies in late 2011. This strategy has resulted in a 7 percent revenue increase year-over- year, and the company continues to pursue cross-sell activities to further enhance these lines of business. Fitch believes 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.

Rating Sensitivities-IDRs and VR

Fitch believes the current ratings are at the higher-end of their potential range given BCB's scale of operations and limited diversity.

As noted above, Fitch believes BCB's underlying fundamentals such as franchise value and profitability to be more reflective of a 'BB' rating. Thus Fitch considers BCB's unusually 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, was not maintained between 35 percent and 40 percent, or if capital ratios fell below 20 percent. 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.

Key Rating Drivers and Sensitivities-Support Rating

BCB has a Support Ratings of '5' and Support Floor Rating of 'NF'. In Fitch's view, BCB is not systemically important in the local Bermuda market and therefore, Fitch believes the probability of support is unlikely. IDRs and VRs do not incorporate any support for BCB.

Fitch has affirmed the following ratings:

Bermuda Commercial Bank

--Long-term IDR at 'BBB-'; Outlook Stable

--Short-term IDR at 'F3';

--Viability Rating at 'bbb-'

--Support at '5';

--Support Floor at 'NF'.

Additional information is available at 'fitchratings.com.

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