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

DBRS has today confirmed the ratings of National Bank of Canada (National or the Bank), including its Deposits & Senior Debt rating at AA (low) and its Short-Term Instruments rating at R-1 (middle). All trends remain Stable.

National continues to maintain its strong regional franchise in Québec, with particular emphasis on its retail, small business and commercial banking units and on its wealth management businesses. While the Bank’s strong market shares in its home province remain a key strength, the rating reflects National’s regional concentration in Québec, which accounted for 64% of its revenues in 2009.

National’s revenue is diversified by business line: in addition to the 50% of earnings (excluding the Other segment for the first three quarters of 2009) generated by the personal and commercial banking unit, the Bank generated 41% of earnings from the financial markets business and a further 9% from its wealth management operations.

National is more exposed to capital markets and trading revenue than its peers, which could result in earnings volatility. While the Bank continues to have material exposure to Master Asset Vehicle notes (the MAV Notes), which were created when non-bank-sponsored asset-backed commercial paper (ABCP) covered under the Montréal Accord was converted to long-term notes, further material deterioration from current levels would be necessary to have capital implications for the Bank.

National’s Deposits & Senior Debt rating at 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 for the ratings of both the Senior Debt & Deposits and the Subordinated Debt.

National’s net income before non-recurring items increased 22% in the first nine months of 2010 in comparison with the first nine months of 2009 on lower loan loss provisions and securities gains, which were partially offset by lower trading and securitization revenues and higher expense levels. While not unexpected, total trading revenue (including interest and non-interest income) decreased 40% in the first three quarters of 2010 to account for 8.2% (down from 14.6% in the first three quarters of 2009) of total revenues (the trading environment was very strong in the comparative period in 2009). Most of the revenues were recorded as net interest income.

National’s asset-quality metrics with respect to its lending operation outperformed most of its peers through the recession, in part reflecting the Québec economy’s comparative resilience through the downturn, although the Bank was more exposed to the Montréal Accord ABCP/MAV Notes situation. Loan loss provisions declined to $107 million in the first three quarters of 2010 from $251 million in the comparative period in 2009; the improvement was largely a result of a $126 million provision related to commitments extended to holders of the MAV Notes. Credit card receivables and personal loans remain under some modest pressure.

National adopted the advanced internal ratings-based (IRB) approach for credit risk under Basel II, beginning on November 1, 2009, which contributed to the increase in the Tier 1 capital ratio by 231 basis points over the first three quarters of 2010. Internal capital generation improved materially in the first nine months of 2010 to 7.9% from 6.1% in the first three quarters of 2009.

Notes:
The rating for the Cumulative Preferred Shares is notional since there are none outstanding.

All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organizations, Rating Bank Preferred Shares and Equivalent Hybrids and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on the DBRS website under Methodologies.