DBRS Confirms National Bank at AA (low) and R-1 (middle)

DBRS has today confirmed the ratings of National Bank of Canada (National Bank or the Bank) as listed below. All trends remain Stable. National Bank continues to maintain its strong regional franchise in Québec, with particular emphasis on its retail, small business and commercial banking units and wealth management businesses.

While strong market shares in the home province remain a key strength of the Bank, the rating continues to reflect the Bank’s regional concentration in Québec, which accounted for 66% of its revenues in 2008.

National Bank’s revenue is diversified by business line, with a significant contribution from its financial market franchise and reasonable wealth management operations that contributed 43% and 11%, respectively, of adjusted operating income in the first three quarters of 2009 (excluding the other segment). National Bank is more exposed to capital market and trading revenue than its peers, which could result in earnings volatility.

While the Bank has material exposure to non-bank-sponsored asset-backed commercial paper covered under the Montréal accord, which has been restructured into various classes of Master Asset Vehicle notes (the MAV Notes), further material deterioration from current levels would be necessary for there to be any capital implications for the Bank.

National Bank’s Deposits & Senior Debt rating of AA (low) is composed of an intrinsic assessment of A (high) and a support assessment of SA2 (reflecting the expectation of systemic and timely external support by the Government of Canada), which results in a one-notch increase from the intrinsic assessment to both the Senior Debt & Deposits and Subordinated Debt ratings.

On June 29, 2009, DBRS announced a change to the banking methodology related to bank preferred shares and Tier 1 innovative instruments. The change resulted in a downgrade of these instruments by two notches. Please see the DBRS press release for further details.

Despite the difficult economic and market environments, National Bank recorded only a marginal decrease in net income before non-recurring items in the first three quarters of 2009, although this earnings resilience was largely driven by trading gains and securitization revenues.

The Québec economy appears to have weathered the difficult economic environment of the past year quite well, and as a result, National Bank has only experienced modest increases in non-performing loans relative to its peers. The increase in loan loss provisions thus far in 2009 was primarily driven by a provision on commitments to extend credit to clients holding MAV Notes; there were small increases related to other portfolios as well.

National Bank has maintained a reasonable financial risk profile with acceptable flexibility, with particular strength in its liquidity and a relatively high level of individual deposit funding. While the Bank’s capital ratios are lower than the peer group, management hopes to receive Office of the Superintendent of Financial Institutions approval to adopt the advanced internal ratings-based approach for credit risk under Basel II beginning in November 2009, which could add 60 basis points to Tier 1 capital.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Banks in Canada and Rating Bank Preferred Shares and Equivalent Hybrids, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.