Butterfield's Profitable Banking And Trust Operations Overshadowed By Regulatory Concerns

Stephen Simpson profile picture
Stephen Simpson


  • Butterfield is an unusually profitable bank, but its loan growth opportunities seem limited, and investors have some concerns about its regulatory compliance given its operations in known tax havens.
  • It has a very clean credit profile, low-cost deposits, high asset sensitivity, and a sizable trust business that should provide a good multiyear growth platform.
  • Even with a heavier risk weighting due to higher (perceived) regulatory/supervisory risk, NTB seems undervalued on the basis of its returns on tangible equity and its growth prospects.

For a lot of reasons, Bank of N.T. Butterfield & Son (or "Butterfield") (NYSE:NTB) is an odd bank. It's the only publicly-traded pure-play on banking in Bermuda and the Cayman Islands, it has uncommonly high market share, and it operates with uncommonly low risk-weighted assets. It also has a very healthy trust business and quite a bit of capital, not to mention above-average asset sensitivity.

Perhaps odder still is that this bank actually looks undervalued. Although I think it will be a challenge for Butterfield to deliver meaningful loan growth, the interest sensitivity and fee-generating businesses should generate revenue growth and good expense leverage. While compliance, regulatory, and oversight risks are real, even with an elevated discount rate, these shares look potentially undervalued today, with a solid dividend kicker as well.

A Bank For The Offshore Havens

Territories and jurisdictions like Bermuda, the Cayman Islands, and Guernsey are perhaps best known as tax havens and offshore financial centers; places where businesses will locate their legal headquarters so as to reduce their corporate tax bills and/or benefit from less regulatory scrutiny and burden. In the case of these three areas (which make up about 95% of Butterfield's revenue), that has meant large contributions to GDP from insurance, banking, and fund management companies, with tourism a meaningful runner-up as a contributing industry.

In terms of deposit and loan market share, Butterfield is the largest bank operating in Bermuda and the Caymans, and it generates around 55% of its revenue from Bermuda and about 30% from the Caymans (with its loan book reflecting a broadly similar weighting).

Although Butterfield used to engage in a meaningful amount of commercial lending, serious losses on commercial real estate loans made to the hospitality industry a decade ago threatened the survival of the bank. Butterfield retrenched and restructured, bringing in

This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor. Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That last part isn't entirely true. Probably.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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