But things are changing dramatically in this tiny British colony in the middle of the Atlantic. For in February, HSBC Holdings, the world’s second biggest bank, bought the island’s biggest company, Bank of Bermuda, for $1.3bn.
Bermuda has developed into a financial powerhouse in the past two decades, as home to the biggest insurance market outside Lloyd’s of London and New York. It is market leader in captive insurance companies, and 13,500 foreign businesses are nominally headquartered on the low-tax island (though fewer than 400 have a physical presence there).
But its banking sector was a closed shop until recently. Strict rules limiting foreign ownership of any Bermudian business to 40% have now been relaxed and Bank of Bermuda was the first to be given an exemption. With billions of dollars of capital in Bermuda from reinsurance and international finance, there is ample opportunity for big international banks.
Expansion is priority
Bermuda has not developed like offshore jurisdictions further south in the Caribbean, where there are hundreds of brass-plate banks. It has just four banks, although the centre-left Progressive Labour Party government has prioritised expanding financial services and it believes a further five banks could open.
“The expansion of financial services has been assigned a high priority by the government of Bermuda,” says Paula Cox, the island’s finance minister. “We have a financial policy development committee, which has made some recommendations and is now going to help move things forward. Included in those recommendations will be how much we should be looking at opening up.”
Bermuda’s Washington-based financial adviser, Dr Andrew Brimmer, says: “For Bermuda to be a world class financial centre there has to be more than one top bank. The financial services industry is an amalgamation of different services; there has to be an aggregate of services.”
The independent regulator, Bermuda Monetary Authority, has already had several enquiries from overseas banks, says Ms Cox. Bermuda’s oldest bank is Bank of NT Butterfield & Sons, followed by Bermuda Commercial Bank, which is favoured by corporate clients and high net worth individuals. The newest kid on the block is Capital G Bank, a small retail institution.
In 2000, the government decided to open up business by offering exemptions from the 60/40 ownership rules, and Bank of Bermuda and Bank of Butterfield were the first to win approval.
Bank of Bermuda listed on Nasdaq in a controversial move that had locals fearing a large bank such as Chase Manhattan would swallow up the small profitable bank. At the time, the bank said this could never happen. Heavy on capital and generating healthy profits and good dividends year after year, it viewed its stock price as undervalued at about $26 on the Bermuda Stock Exchange, at a time when world markets were going into orbit. After the exemption was granted, the share price rose to $55.25 on May 30, 2001, the highest price it had ever been, with speculation that the listing would push it up to $72. When it finally listed in April 2002, however, world markets had crashed and on its first day of trading it hit only $48.
International money
Bermuda’s 13,500 international companies had foreign earnings of $541m for the first six months of 2003 (the latest available figures). They spent an estimated $1.05bn in Bermuda in 2002, according to the 2004 Bermuda budget statement. HSBC is hoping to take in some of the international business money that has bypassed local banks because they were too small, which is why group chairman of HSBC Holdings Sir John Bond flew in earlier this year to wine and dine the island’s executives.
HSBC was particularly keen on Bank of Bermuda’s successful global financial services section and its list of wealthy clients. The buy-out allowed HSBC to break into the offshore trust business by buying a successful operation lock, stock and barrel.
“When he was here, Sir John Bond said HSBC interest in Bermuda was many years in the making and had our transaction not successfully concluded, he would have been on the doorstep of the chairman of the Bermuda Monetary Authority for a licence to do business in Bermuda,” says Philip Butterfield, the new chief executive officer of Bank of Bermuda HSBC and the first black man to head up a bank in Bermuda, appointed by the new owners. “So it was very clear that Bermuda as a jurisdiction was a business priority for HSBC. And it does not surprise me that after reaching those conclusions about Bermuda as a jurisdiction, they naturally would have been interested in the bank here, because of our history, size and prominence in the local market.”
Bank of Butterfield also won a 60/40 exemption in 2001 and reached an all-time high of $35 after languishing at about $18 before the announcement. Known as “Bank of Blunderfield” in the 1990s for its sloppy practices, it was turned around by former vice-president of international banking at Bank of Nova Scotia Calum Johnston. It turned in 14 consecutive quarters of record profits when he left the post of president and CEO in 2002 after four years (see box copy).
Butterfield buys
His successor Alan Thompson took a plan to the board for targeted expansion that would give Bank of Butterfield a global platform for its wealth management, trusts and private banking – and since then he has been on a buying spree.
The most spectacular in a series of buys was its offer for top-shelf private London bank Leopold Joseph Holdings, for £51.1m ($94.5m), subject to regulatory and shareholder approval. “It is a good fit for us,” says Mr Thompson. “We have the same core values, and that is important.” If it gets the green light, it will bring the number of staff globally at Bank of Butterfield to more than 1500.
Bank of Butterfield’s first buy was in August 2003, when it bought Thorland Bank and Trust, a Bahamian-owned offshore bank. This was followed quickly by Leopold Joseph (Bahamas) Ltd, a subsidiary of Leopold Joseph (that was how Butterfield got to know the Leopold Joseph management and how, when the company went up for sale in September that year, it was at the front of the queue). The two acquisitions were merged at the end of 2003 to become Bank of Butterfield (Bahamas) Ltd with assets worth $1bn–$1.5bn.
In December, Bank of Butterfield acquired The Mutual Bank of the Caribbean, a Barbadian retail bank with assets worth $125m. The mutual has 15,000 customers in Barbados and is a full-service community bank with 115 employees. Then came Deerfield Fund Services, a small Bahamian bank with 12 employees, followed a few days later by a bid for Leopold Joseph.
Bank of Butterfield is coy about whether it is looking at further expansion but says that if the right small bank comes along that fits the mix, it has the money to buy it. Its share price has rocketed to an all-time high of $46.25 following HSBC’s acquisition of Bank of Bermuda and speculation that a large bank may be interested in buying it. The Royal Bank of Scotland’s name has been mentioned but such rumours have been neither confirmed nor denied.
Alan Thompson, Bank of Butterfield
Confident stance
Bermuda’s banking community is confident that bright times lie ahead. “It is clear from a jurisdiction standpoint that Bermuda represents an advantage over other localities,” says Bank of Bermuda’s Mr Butterfield. “We are a more appropriately regulated jurisdiction. All of the external analyses affirm our standing to that effect and that puts us at an advantage. The second attraction is the repository of capability that is present on the island. We have very attractive legislation; we have legal and accounting expertise that allows new business activity to be consummated on a far better schedule than elsewhere.”
Mr Thompson says: “If you look at banking in general in the global market it is changing rapidly and there is consolidation going on. And increasingly the customer expectations for all banks are going up. So I think that every bank has to decide where it has a competitive advantage and what its strategies are going to be. Just being a so-so, also-ran bank is no longer a strategy that is going to work.”
Now that change has started, it may only be a question of time before the doormen in the banks are replaced, the customers are convinced to use electronic payment methods and the banking halls emptied of many staff. And while this may make banks more efficient and make more money for their shareholders, there will be nostalgia in Bermuda for the way things were. Ruthless clean up at bank of butterfield Two years ago when he was leaving Bank of Butterfield, former president and CEO Calum Johnston said that the bank had been given a clean bill of health before he arrived and he had been shocked to discover the problems at the heart of the business. His predecessor, John Tugwell, had written off $20.6m for discontinuing operations in Singapore and London, after years of inefficiency and falling profits. The bank still had great capital strength but, instead of being able to report record profits, Mr Johnston had to clean up the mistakes made by former management in entering the London loan market, which led to the bank having to take $33m off its balance sheet and making $50m in provisions for potential loan losses in London. “The real problem was that nobody knew how bad the problems were, it was just that it had been mismanaged for a long time,” says Mr Johnston. “There was nothing to do but to get on and fix it.” Although he was hugely unpopular at first, his clean-out was ruthless. Staff were fired, new systems put in place and the London operations closed. In two years, morale rose, the bank focused on core businesses and profits doubled to more than $50m.
