Fitch Affirms Ratings for 2 Canadian Mortgage Covered Bond Programs

NEW YORK--()--Fitch Ratings has affirmed the ratings of two Canadian mortgage covered bond programs following the agency's annual reviews of the programs. The ratings of the outstanding covered bonds issued by National Bank of Canada (NBC: 'A+'/'F1'; Stable Outlook by Fitch) under its structured program and Royal Bank of Canada (RBC: 'AA'/'F1+'; Stable Outlook) under its registered program are affirmed at 'AAA' with a Stable Outlook. NBC's structured program remains in wind-down following the introduction of covered bond legislation in 2012 which prohibits issuance of covered bonds secured by insured mortgages.

KEY RATING DRIVERS

NBC's STRUCTURED MORTGAGE COVERED BONDS: The 'AAA' rating of NBC's structured mortgage covered bonds is based on the issuer's Long-term Issuer Default Rating (IDR) of 'A+', Fitch's unchanged Discontinuity Cap (D-Cap) of 3 (moderate high risk) and the program's contractual asset percentage (AP) of 93.2%, which provides more protection than the 'AAA' breakeven AP supporting Fitch's rating of 95%. The current contractual AP supports the rating on an 'AAA' probability of default (PD) basis. Since bail-in is not an explicit provision under the current Canadian framework, in Fitch's view, the IDR remains a satisfactory indicator of the likelihood that the recourse against the cover pool would be enforced, and no IDR uplift is applicable.

CAD-equivalent 2 billion soft bullet bonds are outstanding under the program. They are secured by a cover pool consisting of CAD2.9 billion Canada Mortgage and Housing Corporation (CMHC)-insured residential mortgages as of April 2014. The 'AAA' breakeven AP is driven by a weighted average (WA) PD of 30.25% and a WA recovery rate (RR) of 96.5% on the cover pool in an 'AAA' scenario, which takes into account the benefit of the CMHC insurance on the mortgage loans. The assets have a WA residual maturity of approximately 1.1 years while the covered bonds have a WA residual maturity of 2.4 years.

RBC's REGISTERED MORTGAGE COVERED BONDS: The 'AAA' rating of RBC's structured mortgage covered bonds is based on the issuer's Long-term IDR of 'AA', Fitch's unchanged D-Cap of 3 (moderate high risk) and the program's contractual AP of 93%, which provides more protection than the 'AAA' breakeven AP supporting Fitch's rating of 95%. The current contractual AP supports the rating on an 'AAA' PD basis. Since bail-in is not an explicit provision under the current Canadian framework, in Fitch's view, the IDR remains a satisfactory indicator of the likelihood that the recourse against the cover pool would be enforced, and no IDR uplift is applicable.

CAD-equivalent 21.9 billion soft bullet bonds are outstanding under the program, which includes the EUR 1 billion Series CB15 closing June 19, 2014. They are secured by a CAD 34 billion cover pool consisting of uninsured Canadian residential mortgages. The 'AAA' breakeven AP is driven by a WA PD of 15.5% and a WA RR of 65.4% on the cover pool in an 'AAA' scenario. The assets have a WA residual maturity of approximately 2.1 years while the covered bonds, including Series CB15, have a WA residual maturity of 3.6 years.

RATING SENSITIVITIES

NBC's STRUCTURED and RBC's REGISTERED MORTGAGE COVERED BONDS

NBC's structured covered bonds' rating would be vulnerable to a downgrade if any of the following occurred: (i) the IDR was downgraded by two notches to 'A-', (ii) the D-Cap fell to 1 (very high risk), or (iii) the AP that Fitch takes into account in its analysis exceeded 95%.

For NBC's structured mortgage covered bonds, if CMHC lost the full backing of the Government of Canada, or if the Government of Canada's rating suffered a downgrade, Fitch would revise the credit given the insurance provided by CMHC on the mortgage loans in the cover pool. This could lead to weaker liquidity as well as higher credit risk expectations for the cover pool. As a result, the D-Cap would likely decrease and the breakeven AP for the current covered bonds' ratings would likely decrease as well.

RBC's registered covered bonds' rating would be vulnerable to a downgrade if any of the following occurred: (i) the IDR was downgraded by four notches to 'A-', or (ii) the AP that Fitch takes into account in its analysis exceeded 95%. The covered bonds' rating could be maintained even if the D-Cap was reduced to 0 (full discontinuity), subject to a satisfactory level of AP, given the issuer's current IDR of 'AA' which enables the bonds to reach 'AAA' taking only recoveries into account.

Fitch's breakeven AP for a given covered bond's ratings will be affected by, among other factors, the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuances. Therefore it cannot be assumed to remain stable over time.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Covered Bonds Rating Criteria' (March 2014);

--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 2014);

--'Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum' (May 2014);

--'Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds' (January 2014);

--'Covered Bonds Rating Criteria - Mortgage Liquidity and Refinancing Stress Addendum' (February 2014);

--'Canadian Residential Mortgage Loan Loss Model Criteria' (May 2014).

Applicable Criteria and Related Research:

Covered Bonds Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=738975

Counterparty Criteria for Structured Finance and Covered Bonds

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158

Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744175

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725537

Covered Bonds Rating Criteria -- Mortgage Liquidity and Refinancing Stress Addendum

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=719757

Canadian Residential Mortgage Loan Loss Model

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708242

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=835267

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Vanessa Purwin, +1-212-908-0269
Senior Director
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Roger Lin, +1-212-908-0778
Director
or
Committee Chairperson
Rui Pereira, +1-212-908-0766
Managing Director
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Sharing

Contacts

Fitch Ratings, Inc.
Primary Analyst
Vanessa Purwin, +1-212-908-0269
Senior Director
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Roger Lin, +1-212-908-0778
Director
or
Committee Chairperson
Rui Pereira, +1-212-908-0766
Managing Director
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com