DBRS Confirms Manulife Bank of Canada at A (high), R-1 (middle)

DBRS has today confirmed the non-guaranteed long- and short-term ratings of Manulife Bank of Canada (Manulife Bank or the Bank) at A (high) and R-1 (middle), respectively, and its guaranteed long-term rating at AA (low). 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 from its parent, The Manufacturers Life Insurance Company (MLI; rated AA (low)). 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 also relies on MLI’s relationships with financial advisors for asset gathering and some funding. Manulife Bank generated 14% of the DBRS-adjusted IFRS earnings of MLI’s parent, Manulife Financial Corporation (MFC), in 2011, which is overstated as a result of weak earnings at MFC.

On its own, Manulife Bank has solid asset quality, a strong earnings profile and reasonable liquidity, funding and capital profiles (although its level of funding diversification could be improved). Manulife Bank’s challenges include its reliance on spread income, which leaves the Bank susceptible to spread compression, and its dependence on a narrow range of key products.

The Deposit Notes, which are guaranteed by The Manufacturers Life Insurance Company, will be fully repaid by April 2013. These are amortizing notes issued prior to June 1, 2005, by Manulife Bank, and their rating was based on a flow-through of MLI’s ratings.

The Bank continues to generate strong earnings through robust loan and deposit growth. Changes in regulation surrounding the insurability of home equity lines of credit and potential concerns around the amount of equity that can be withdrawn using a home equity line of credit will likely slow the rate of asset growth relative to the 20% growth rate witnessed in the past.

Manulife Trust Company (Manulife Trust), a wholly-owned trust company subsidiary of the Bank, was launched in part to facilitate deposit funding (investment savings accounts, GICs, etc.) and growth in residential mortgage origination. Since Manulife Trust’s inception in September 2010, deposits have reached $2.3 billion as of the end of December 31, 2011.

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

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (January 2010) and DBRS Criteria: Intrinsic and Support Assessments (February 2009), which can be found on DBRS’s website at www.dbrs.com.

The Deposit Notes rating reflects approximately $19.2 million of amortizing notes (as of December 31, 2011) that mature in April 2013.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The sources of information used for this rating include company documents. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

For additional information on this rating, please see the DBRS Limited: Banks and Banking Organisations Linking Document by clicking the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

Lead Analyst: Brenda Lum
Rating Committee Chair: Brenda Lum
Initial Rating Date: January 14, 2002
Most Recent Rating Update: May 11, 2011