NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded the Support Ratings (SRs) to '2' from '1' and revised the Support Rating Floors (SRFs) to ' 'BBB-' from 'A-', respectively, for BMO Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Canadian Imperial Bank of Commerce (CIBC), Caisse Centrale Desjardins (CCD), National Bank of Canada (NBC), Royal Bank of Canada (RY), and Toronto-Dominion Bank (The) (TD), collectively referred to as 'Canadian Banks'. The rating actions have been taken in conjunction with a review of support for banks globally.
SR's reflects Fitch's view regarding the likelihood that a bank will receive extraordinary support such as capital injections in case of need to make an institution viable, which can be either institutional or sovereign support. SRs are assigned on a five-point scale, with '1' representing an extremely high probability of support, and '5' indicating that support cannot be relied on. In assessing sovereign support, Fitch focuses on key factors such as sovereign's ability to support, a country's propensity to support the banking sector and the probability to support a specific institution.
Each SR maps to a minimum level for the entity's Long-Term IDRs. For sovereign-driven support ratings, Fitch also assigns SRFs. SRFs indicate the minimum level to which the entity's Long-Term IDRs could fall if Fitch does not change its view on potential sovereign support.
BMO, BNS, CIBC, CCD, NBC, RY, and TD's Long-term Issuer Default Ratings (IDRs) are all above the Support Rating Floors thus do not currently incorporate any government support, and reflect their standalone strengths only. As such, absent a material in change economic conditions or the companies' stand-alone credit profiles; any changes to their SRs or SRFs have no impact on the companies IDRs. Fitch notes that the Canadian Banks' IDRs and senior debt ratings do not benefit from support because their VRs are all currently above their SRFs.
Fitch has also affirmed the Support Ratings of BMO Harris Bank National Association, CIBC World Markets PLC, TD Bank U.S. Holding Company and TD Bank, NA at '1'. These ratings are driven by institutional support from their respective parent companies, and are not subject to Fitch's evolving view of support noted in this release.
KEY RATING DRIVERS - SUPPORT RATINGS AND SUPPORT RATING FLOORS
The downgrade of the SRs and revised the SRFs of the Canadian Banks' reflects Fitch's view that although a high probability of support from the Canadian government (AAA; Rating Outlook Stable) continues to exist, the propensity to do so is less than previously given changes to banking legislation that clearly seeks to avoid taxpayer-funded bail-outs by pushing losses on creditors first.
Fitch has revised the SRs to '2' from '1', which remains high on a global comparison. In our view, the likelihood of support remains high for Canadian Banks due to their systemic importance in the country, significant concentration overall in of Canadian banking assets amongst the institutions noted above, which account for over 90% of total banking assets, the large size of the banking sector with banking assets at 2.1 times Canada's GDP, and the Canadian Banks' position as key providers of financial services to its local economy. In Fitch's view, Canadian banking authorities through the CDIC Act, have wide latitude to resolve a troubled bank including re-capitalizing an institution, creating a bridge bank, or imposing losses on creditors.
However, the government's willingness to provide support for D-SIFI's in Canada has been reduced, as demonstrated by Department of Finance consultation paper which outlines the proposed bail-in regime as banking regulators seek to protect tax payers from the risk of a large financial institution failing. This is evidenced by the proposed issuance of non-voting contingent capital (NVCC) instruments, resolution powers given regulatory authorities under the CDIC Act, and other initiatives that demonstrate the Canadian government's progress to reduce the propensity of state support for banks going forward.
RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
Fitch has classified Canada as a Path 2 country as defined weakening of sovereign support propensity, which also outlined the base case for future SR and SRF in line with today's downgrade revision of SRs and SRFs. Please see special report 'Sovereign Support for Banks: Rating Path Expectations' published March 27, 2014, for further details.
SR of '2' incorporates Fitch's expectation that there could be some level of support for the Canadian Banks going forward although it has been weakened given bail-in legislation. Although Canadian authorities have taken steps to improve resolution powers and tools, they intend to maintain a flexible approach to bank resolution.
Fitch's assessment of continuing support for Canadian D-SIFI's has to some extent relied upon resolution powers granted regulators under the CDIC ACT as well as the potential size, structure, and feasibility of NVCC implementation. Further, continued regulatory action to ensure sufficient contingent capital has been implemented for all Canadian banks.
Fitch has downgraded the following Support ratings.
BMO Bank of Montreal
Bank of Nova Scotia
Canadian Imperial Bank of Commerce
Caisse Centrale Desjardins
National Bank of Canada
Royal Bank of Canada
Toronto-Dominion Bank (The)
--Support Rating to '2' from '1';
Fitch has revised the Support Floor ratings:
BMO Bank of Montreal
Bank of Nova Scotia
Canadian Imperial Bank of Commerce
Caisse Centrale Desjardins
National Bank of Canada
Royal Bank of Canada
Toronto-Dominion Bank (The)
--Support Rating Floor to 'BBB-' from 'A-'.
Fitch has affirmed the following ratings:
BMO Harris Bank National Association (formerly Harris N.A.)
CIBC World Markets Plc
TD Bank U.S. Holding Company
TD Bank, NA
--Support Rating at '1';
Additional information is available at www.fitchratings.com
In addition to the source(s) of information identified in Fitch's Master Criteria, these actions were additionally informed by information provided by the companies.
Applicable Criteria and Related Research:
--'Global Bank Rating Criteria' (March 2015);
--'Sovereign Support for Banks: Rating Path Expectations' (March 2014).
Applicable Criteria and Related Research:
Global Bank Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501
Sovereign Support For Banks: Rating Path Expectations
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=741975
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984990
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