CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of the six largest Canadian banks by assets (referred to as the Big Six) following a peer review committee. The six banks included in this peer review are Bank of Montreal (BMO; rated 'AA-/F1+'), Bank of Nova Scotia (BNS; rated 'AA-/F1+'), Canadian Imperial Bank of Commerce (CIBC; rated 'AA-/F1+'), National Bank of Canada (NBC; rated 'A+/F1'), Royal Bank of Canada (RBC; rated 'AA/F1+') and Toronto-Dominion Bank (TD; rated 'AA-/F1+'). The outlooks for all six banks are Stable. A complete list of ratings is included at the end of this rating action commentary.
RATING ACTION AND RATIONALE
The rating affirmations and Stable Outlooks reflect sound capital levels, high asset quality, continued earnings stability, strong funding and liquidity positions and favorable metrics relative to comparably rated international peers. These strengths are counterbalanced by continued risk with respect to the Canadian residential housing market, increasing consumer debt levels, global economic headwinds, slowing loan growth, margin compression and heightened competition.
The main domestic threat to the stability of the Canadian banks is the record level of consumer indebtedness and the risk of overvaluation in the housing market. Between 2001 and 2012, Canadian home prices appreciated by approximately 116% and the household debt-to-disposable income ratio increased to 166.7 from 108.3. These increases are set against a backdrop of unemployment remaining above 7% and GDP growth hovering in the 2%-3% range.
The increased vulnerability of Canadian households to an adverse shock could pressure Canadian banks' ratings should borrowers' ability to pay weaken due to worsening domestic or global economic conditions. Fitch believes the immediate impact of deterioration in the household sector would be partly mitigated by a number of structural factors, including the high proportion of mortgages that the banks have insured with Canada Mortgage and Housing Corporation and low initial loan to value ratios on uninsured mortgages.
Canadian banks also benefit from sound capital levels commensurate with their asset mix and loss experience, leaving the banks well positioned to withstand a moderate housing stress. Continued profitability has helped them prepare for higher capital requirements under Basel III rules effective in 2013 ahead of the international 2019 deadline. Balance sheet liquidity and funding remain sound, reflecting the banks' stable deposit funding bases combined with continued affordable access to global capital markets.
SENSITIVITY/RATING DRIVERS - VRs and IDRs
Fitch does not believe there is upside rating potential for the big six banks in the foreseeable future, given their current high ratings and on-going uncertainty with respect to the Canadian residential mortgage market and broader international markets. Ratings assigned to NBC, which are one to two notches lower than those assigned to the bank's five peers, reflect its more regional concentration in the province of Quebec.
Ratings assigned to all six banks could be adversely affected by a sharp reversal in Canadian housing prices that weakens consumers' ability to pay while driving rapid and disorderly consumer deleveraging. Banks with lower levels of insured mortgage exposure (such as RBC) would likely be more exposed to the first order effects of a housing downturn than those that have higher levels of mortgage insurance (such as CIBC and TD). In the case of NBC, given its geographic concentration in Quebec, its ratings would be more sensitive to a housing downturn that was concentrated within this province.
Other potential negative rating drivers include contagion risk from U.S., European or Asian markets, weakened capital or liquidity positions, or material acquisitions outside of Canada. Fitch may have a negative rating bias towards large acquisitions that are outside of Canada and/or that increase leverage or introduce undue integration costs. In the case of U.S. contagion, those banks with meaningful U.S. operations (such as BMO and TD) could be more exposed to the effects of a U.S. downturn. Banks with larger trading activities as a percent of total revenues (such as RBC and BNS) could be exposed to negative rating pressure in the event of outsized losses and or performance volatility with respect to this business line, particularly if it grows to represent a larger portion of overall revenues.
SENSITIVITY/RATING DRIVERS- Support Ratings and Support Floor Ratings
The banks' current Issuer Default Ratings (IDRs) are equalized with their viability ratings (VRs), which remain above the support rating floor of 'A-' and reflect the very high fundamental credit quality of the institutions. All six banks have a support rating of '1' and a support rating floor of 'A-', reflecting the banks' systemic importance to the Canadian economy, the expectation that the banks will shortly be designated as domestic strategically important banks (D-SIBs) and the credit quality and financial resources of Canada (rated 'AAA/F1+', Outlook Stable) to provide support if necessary. At the banks' current VRs, the long-term IDRs would not be affected by a change in support rating floor.
SENSITIVITY/RATING DRIVERS - Subordinated Debt and Other Hybrid Securities
Subordinated debt and other hybrid capital issued by the banks and by various issuing vehicles are all notched down from the banks' (or bank subsidiaries') VRs in accordance with Fitch's assessment of each instrument's respective nonperformance and relative loss severity risk profiles. The subordinated debt and hybrid capital ratings are primarily sensitive to any change in the VRs of the banks (or bank subsidiaries).
SENSITIVITY/RATING DRIVERS - Subsidiary and Affiliated Company Ratings
All of the subsidiaries and affiliated companies reviewed as part of the Canadian bank peer review factor in a high probability of support from parent institutions to the subsidiaries. This reflects the fact that performing parent banks have very rarely allowed subsidiaries to default. It also considers the high level of integration, brand, management, financial and reputational incentives to avoid subsidiary defaults.
Fitch has affirmed the following ratings:
Bank of Montreal
--Long-term IDR at 'AA-', Outlook Stable;
--VR at 'aa-';
--Short-term IDR at 'F1+';
--Senior unsecured debt at 'AA-';
--Subordinated debt at 'A+';
--Commercial paper at `F1+';
--Support Rating at '1';
--Support Floor at 'A-'.
BMO Harris Bank National Association (formerly Harris N.A.)
--Long-term IDR at 'AA-', Outlook Stable;
--VR at 'bbb+';
--Long-term deposits at 'AA';
--Short-term IDR at 'F1+';
--Short-term deposits at 'F1+';
--Support Floor at '1'.
BMO Subordinated Notes Trust
--Subordinated debt at 'A+'.
BMO Capital Trust D
BMO Capital Trust E
BMO Capital Trust II
--Preferred stock rating at 'BBB'.
Marshall & Ilsley Corporation
--Senior debt affirmed at 'AA-'.
M&I Marshall & Ilsley Bank
--Long-term deposits at 'AA';
--Senior debt at 'AA-';
--Subordinated debt at 'A+';
--Short-term deposits at 'F1+'.
M&I Bank FSB
--Long-term deposits at 'AA';
--Short-term deposits at 'F1+'.
Bank of Nova Scotia
--Long-term IDR at 'AA-', Outlook Stable;
--Short-term IDR at 'F1+';
--Long-term deposits at 'AA-';
--Senior debt at 'AA-';
--Subordinated debt at 'A+';
--Short-term debt at 'F1+';
--VR at 'aa-';
--Support Rating at '1';
--Support Rating Floor at 'A-'.
Scotiabank Capital Trust
--Trust Securities at 'BBB'.
Canadian Imperial Bank of Commerce
--Long-term IDR at 'AA-', Outlook Stable;
--Short-term IDR at 'F1+';
--VR at 'aa-'
--Short-term debt at 'F1+';
--Senior unsecured debt at 'AA-';
--Senior market-linked securities at 'AA-emr';
--Subordinated debt at 'A+';
--Preferred stock at 'BBB';
--Support Rating at '1';
--Support Rating Floor at 'A-'.
Canadian Imperial Holdings, Inc.
--Short-term debt at 'F1+'.
CIBC World Markets Plc
--Long-term IDR 'AA-', Outlook Stable;
--Short-term IDR 'F1+';
--Support Rating '1'.
CIBC Capital Trust
--Preferred stock at 'BBB'.
National Bank of Canada
--Long-term IDR at 'A+', Outlook Stable;
--Short-term IDR at 'F1';
--VR at 'a+';
--Senior debt at 'A+';
--Subordinated debt at 'A';
--Preferred stock at 'BBB-';
--Short-term deposits at 'F1';
--Support Rating at '1';
--Support Rating Floor at 'A-'.
National Bank of Canada New York Branch
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.
NBC Asset Trust
--Preferred Stock at 'BBB-'.
Royal Bank of Canada
--Long-term IDR at 'AA', Outlook Stable;
--VR at 'aa';
--Short-term IDR at 'F1+';
--Short-term debt at 'F1+';
--Senior unsecured debt at 'AA';
--Subordinated debt at 'AA-';
--Market-Linked Securities at 'AAemr';
--Support Rating at '1';
--Support Rating Floor at 'A-'.
RBC Capital Trust
RBC Capital Trust II
--Preferred stock at 'BBB+'.
Toronto-Dominion Bank
--Long-term IDR at 'AA-', Outlook Stable;
--Short-term IDR at 'F1+';
--Short-term debt at 'F1+';
--VR at 'aa-';
--Senior debt at 'AA-';
--Subordinated debt at 'A+';
--Preferred at 'BBB';
--Support Rating at '1';
--Support Floor at 'A-'.
TD Bank U.S. Holding Company
--Long-term IDR at 'AA-', Outlook Stable;
--Short-term IDR at 'F1+';
--Support Rating at '1'.
TD Bank, NA
--Long-term IDR at 'AA-', Outlook Stable;
--Short-term IDR at 'F1+';
--Viability Rating at 'a';
--Long-term deposits at 'AA';
--Short-term deposits at 'F1+';
--Senior debt at 'AA-';
--Support Rating at '1'.
TD Capital Trust III, IV
Northgroup Preferred Capital Corporation
--Preferred at 'BBB'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);
--Rating FI Subsidiaries and Holding Companies (Aug. 10, 2012);
--'Assessing and Rating Bank Subordinated and Hybrid Securities' (Dec. 5, 2012);
--'Evaluating Corporate Governance' (Dec. 13, 2011);
--'2013 Outlook: Canadian Banks' (Nov. 14, 2012);
--'Evaluating Canadian Banks' Residential Mortgage Exposure' (May 21, 2012).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181
Rating FI Subsidiaries and Holding Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209
Assessing and Rating Bank Subordinated and Hybrid Securities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695542
Evaluating Corporate Governance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=694649
2013 Outlook: Canadian Banks (Stable Outlook, But Household Debt Remains Key Risk)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695110
Evaluating Canadian Banks￢ﾀﾙ Residential Mortgage Exposure
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679550
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