Bermuda Commercial Bank, one year on
The first anniversary of the rebirth of Bermuda Commercial Bank (BCB) is approaching. A four-year spell of looking for a suitable buyer for the bank ended last spring. The search pre-dated the financial crisis, ran through it, and ended only when the major economies began to emerge from the recession and a blue-chip group of investors stepped forward and bought BCB.
Now the bank is installing new systems, adding products and customers, changing its portfolio mix and driving forward. Having lost not a dollar in the past few years on risky investments, the bank is able to pay an extra margin to depositors, who seem to like what they see. BCB formerly limited its clientele to corporations, but has expanded into wealth management to individuals and families. The move has been well received by those looking for increased security at a time when the global banking system remains out of sorts.
An international venture
Majority ownership in BCB was acquired by a group of international investors. They are represented in Bermuda by chairman and managing director J. Michael Collier, a well-known former Butterfield president and chief executive officer, and by Warren McLeland and Eric Stobart. McLeland was previously with the Reserve Bank of Australia and Chase Manhattan in New York, Hong Kong and Europe. Stobart was formally chief executive officer of Hill Samuel Bank and is a director of Lloyd’s TSB Pension Schemes. Both are directors of BCB.
It took the bank four years to find the right buyer. “In 2006, our directors decided that the bank was in need of a ‘big brother’, so we began looking at a sale,” says Horst Finkbeiner, chief operating officer and a director at BCB. “The timing wasn’t great; we didn’t know a financial crisis was about to arrive. But in April 2010, we finally completed the sale.”
Four main investors headed the acquiring group. Utilico Ltd. and Eclectic are investment funds traded on the London Stock Exchange and its Alternative Investment Market, respectively. Ingot Capital Management is an investment manager. And Resimac is Australia’s largest non-bank lender and securitisation firm, having managed some $12 billion of securitised lendings. BCB director McLeland is also Resimac’s chief executive officer.
“As the sale process progressed, we began to plan what we would do once it was complete,” Finkbeiner says. “We have been actively building out the product set to include new products that our clients tell us they want. We have an opportunity to design our products to meet their requirements, rather than the more traditional banking method of fitting the clients to suit the products.”
Internally, the contrast to the past year, with the drawn-out sale period, could not be more stark. “We’re really incredibly busy,” Finkbeiner says. “Our staff are managing the challenge. In a lot of ways, it’s a change from the rhythm of the bank during the sale process. Everybody is pleased to see new business coming in the door. It’s an exciting time.”
The bank has relationships with many of the insurance companies on the Island. Its focus on corporate business—now being broadened to include individual and family clients—means that the bank already offers a full range of banking services to local and international clients. The new products the bank is launching are attracting good business, predominantly in the private wealth sector.
Corporate banking in Bermuda can be summarised into two basic functions, Finkbeiner says. “One is cash management functions, including such activities as the ability to make payments in and out, placing funds on call or on fixed deposit, and making cash sweeps into investments. The other is holding assets, such as US portfolio investments; carrying out the necessary custody work; providing the accounting; dealing with corporate instructions; collecting interest payments; purchases and sales; and so forth.”
The bank is well advanced in the design and installation of new banking systems. It has been refining its target markets: where the bank should operate and how. “It’s an evolving process,” Finkbeiner says, “and we’re fine-tuning as we go along.”
BCB is adding staff “at a time when other banks are looking at trimming their costs and reducing their staff”, Finkbeiner says. “We’re adding functions and staff where we need it and where it makes sense to do so.”
The way the bank develops will be customer-driven. “Our customers and those we speak to tell us that what is critical to them is rigour and efficiency in terms of operations,” Finkbeiner says. “They want thingsdone right, and they want them done now. They also want immaculate service. They want to talk to a person, not a call centre. They want to know that we will help them get it done. And because we’re small and focused, we can deliver that level of service and intimacy.”
BCB will launch asset management services this year. “We’re going to provide a cost-efficient way for people looking to invest their money to do so,” Finkbeiner says. “Some banks push people towards their own products; our approach is that you can offer a very good service without charging the client so much that they are losing money all the time.”
With just over 40 employees, BCB is nimble. “Larger organisations, by necessity, have more rigid processes, procedures and policies, and perhaps a higher turnover of staff,” Finkbeiner says. “It’s something that often comes with size and scale.”
The bank sees its future in the niche areas in which it is a force: private wealth and commercial banking. “We think that those areas are under-served, both in Bermuda and internationally,” Finkbeiner says.
The prudence concept
BCB did not suffer unduly from the recent economic turmoil. “We’re a very conservative bank, with a largely cash balance sheet,” Finkbeiner said, “but the effect of the financial storms was felt during the period when the bank was for sale. Some of our potential suitors simply disappeared.”
"The bank sees its future in the niche areas in which it is a force: private wealth and commercial banking."
BCB did not practise any of the risky and now discredited lending techniques that proved so disastrous for many in the banking industry.“We weren’t involved in property development, for example,” Finkbeiner says. “We simply didn’t invest in any of the kind of investments that have caused such pain in the last couple of years. We have no impaired assets or write-downs that are a drag on the balance sheet or our profitability, so we are able to offer strongly competitive rates that are appealing to clients.”
Finkbeiner accepts that “having a cash balance sheet may in the past have restricted the top end of the profitability”, but as he points out, “it kept us out of trouble when things went bad”.
The world has become a lot more aware of what banks are doing since the financial crisis. “Frankly, the people who are coming to us don’t want to put their assets at risk in the post-recession climate,” Finkbeiner says. “Generally, people are paying a lot more attention to the stability and security of banks. For example, people are much more aware of capital adequacy ratios. They may lack the technical understanding of the details of, say, Basel II, but they have been seeking out banks with higher ratios.” He is describing the classic flight to quality.
Following the creation of a slightly more aggressive investment portfolio, BCB’s tier 1 capital adequacy ratio is still around 24 percent, which is extremely high by the standards of most other banks. Capital adequacy ratios at the best-managed banks in Asia, for instance, where the excessive banking practices of North America and parts of Europe were not repeated, are at best 15 percent. “People take comfort from that,” Finkbeiner says. “They also now recognise that being a great big bank doesn’t necessarily mean that you’re in a safe place.”
When interest rates fell to their present low levels, BCB found that it was over-exposed to the US Federal Reserve rate, and has since restructured its portfolio. “We are no longer so heavily exposed in that area,” Finkbeiner said. “Adding a mix of high-quality commercial paper and sovereign-backed issues, we have built a strong portfolio that allows us to pay a better interest rate on deposits.”
The bank’s year ends on September 30, and for the 2009/10 year, it recorded a profit, despite the changes taking place. “Most of what we achieved in the year was down to diversifying the way that the bank manages its assets,” Finkbeiner says. “Previously, with the Fed rate near zero, it was a tremendous challenge to earn a profit.”
So, while many banks worldwide are rethinking their model and drawing in their horns, and the credit system remains constipated, Bermuda Commercial Bank is moving in a different direction. “It’s been a long and hard year for all of us at the bank,” Finkbeiner says, “but we are making progress, and that’s a good feeling.”
Horst Finkbeiner is chief operating officer at Bermuda Commercial Bank. He can be contacted at: firstname.lastname@example.org