DBRS Confirms Ratings of First National Financial at BBB and Pfd-3, Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating of First National Financial LP (FNFLP) at BBB and the Senior Secured - Guaranteed Debt and Class A Preference Shares ratings for First National Financial Corporation (FNFC; together with FNFLP, First National or the Company) at BBB and Pfd-3, respectively. All trends remain Stable.

The ratings and trend reflect First National’s status as Canada’s largest non-bank mortgage originator, with almost $86 billion in mortgages under administration (MUA). First National has a strong asset quality profile with nearly all assets being sold to either institutional investors or securitized with minimal residual risk to the Company. All mortgages are secured by real estate and a substantial portion is insured. First National’s high-quality and low-cost servicing capabilities are also important strengths to the franchise.

First National funds most of its MUA either through sales to institutional investors (62%) or by securitization (36%), with the remaining MUA mostly warehoused temporarily, awaiting sale or securitization. The Company is not an OSFI-regulated financial institution and therefore does not have access to funding through deposits. This has contributed to some funding concentration risk.

The business model relies on generating stable underlying cash flows over the life of each loan from the servicing business (the Company retains servicing rights on virtually all originated mortgages) and from the spread between securitized assets and securitization funding. While earnings are occasionally volatile because of timing differences in the way First National hedges its interest rate risk, the servicing business provides stable revenue generation that can mitigate the variability of revenues generated from the new origination business. Originations have the potential to fluctuate with market conditions, but the major costs of origination - broker commissions - are variable, resulting in less earnings volatility than would otherwise be the case. Thanks to its size, the Company’s efficiency, which is critical in the originating and servicing businesses, has been acceptable and is consistently better than its closest peer.

First National’s capital levels are viewed as acceptable for the relatively low levels of direct credit risk being assumed, but the Company could be challenged in the event of large unexpected charges related to operational or other risks.

Like other Canadian mortgage originators and servicers, First National is exposed to the Canadian residential mortgage market and other real estate lending. As a result, the Company’s earnings could come under pressure should housing sales decline, resulting in lower origination and other fee income generation while a downturn in residential mortgage or commercial real estate markets could lead to weakening asset quality of its MUA and ultimately have a negative impact on its business.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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

The applicable methodologies are Global Methodology for Rating Finance Companies and Preferred Share and Hybrid Criteria for Corporate Issuers, which can be found on our website under Methodologies.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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