DBRS Confirms Manulife Bank of Canada at AA (low) and R-1 (middle)

DBRS has today confirmed the non-guaranteed long-term rating of Manulife Bank of Canada (Manulife Bank or the Bank) at AA (low), its guaranteed long-term rating at AA and its short-term rating at R-1 (middle); all trends remain Stable.

Under DBRS’s bank rating methodology, Manulife Bank’s support assessment is SA1, which reflects very strong to good likelihood and predictability of timely explicit or implicit support by its parent, The Manufacturers Life Insurance Company (MLI). However, it is difficult for implicit support to match the clarity and legality of an unconditional guarantee. DBRS considers this difference to be worth one notch on the long-term rating scale for the non-guaranteed long-term rating of Manulife Bank.

The Bank’s business model remains inseparable from the operations of MLI and the Bank shares strategic alignment, branding and significant cross-relationships in management and systems with MLI. The Bank relies on MLI’s relationships with financial advisors for asset gathering and some funding.

On its own, Manulife Bank has solid asset quality, a strong earnings profile and a reasonable financial risk profile. Manulife Bank’s challenges include its reliance on spread income, which leaves the Bank susceptible to spread compression, and its reliance on a narrow range of key products. Net income has steadily grown from $5.1 million in 2002 to almost $77 million in 2008, although earnings in the six months to June 30, 2009, declined 26% relative to the first six months of 2008 on margin compression, higher operating costs and a loan loss provision versus a recovery in the comparative period. DBRS expects a number of factors that caused the earnings reversal in 2009 to abate over the course of the next year.

Manulife Bank is expected to continue to generate high asset growth combined with the maintenance of its low expense ratio. The asset quality profile is conservative and DBRS anticipates it will remain so. Residential mortgages account for about 78% of the loan portfolio (approximately 80% of this portfolio is insured), with the balance primarily in secured investment-related lending.

The long-term deposit notes issued prior to June 1, 2005, by Manulife Bank are fully guaranteed by MLI; these ratings are based on a flow-through of MLI’s ratings. Please see DBRS’s November 24, 2009, press release for more information on MLI’s ratings and trends.

Notes:
The Deposit Notes (guaranteed by The Manufacturers Life Insurance Company) includes term deposit notes, amortizing notes and floating-rate medium-term deposit notes.

All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Banks in Canada and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.