DBRS Confirms Equitable Bank Rating at BBB, Stable Trends

DBRS Limited (DBRS) has today confirmed the BBB rating on the Issuer Rating and Deposits and Senior Debt of Equitable Bank (the Bank) and confirmed a rating of BBB (low) for the Bank’s Subordinated Debt. The BBB (low) Senior Debt rating on its parent, Equitable Group Inc. (the Holding Company, or collectively with the Bank, Equitable or the Company), has also been confirmed. All trends are Stable.

Asset quality is a key ratings driver for the Company. DBRS utilized its structured finance RMBS model to assess the quality of Equitable’s uninsured residential mortgages, while also running the uninsured portion of the commercial portfolio through DBRS’s commercial mortgage-backed securities (CMBS) model. The model results support the conclusion that Equitable is adequately capitalized to support its current ratings based on a runoff scenario. Supplementing this conclusion with additional analysis, DBRS believes Equitable is also adequately capitalized as an active bank.

The asset quality is also evidenced by the Company’s history of low charge-offs, driven largely by the secured nature of the loan book. Equitable’s small size results in a number of concentration-related risks, including geographic loan concentration and limited funding sources (brokered deposits and securitization), although the Bank has expanded its funding sources to include wholesale deposit notes. Equitable has developed some niche business where it is competitive and does not face overwhelming competition. However, the portfolio composition of alternative residential mortgages, small commercial mortgages and larger commercial mortgages (predominantly multifamily residential) has the potential to be problematic in a difficult environment, as a result of concentration in the real estate market; as the most recent downturn was sharp but short in both Ontario and Alberta, the market was not adequately shocked to accurately gauge sensitivity.

Under DBRS’s global rating methodology for banks, the Bank’s long-term Deposits and Senior Debt rating of BBB has an intrinsic assessment of BBB and a support assessment of SA3. The SA3 rating, which reflects the expectation of no timely external support, results in the final rating being equivalent to the intrinsic assessment.

The ratings of debt obligations of the Holding Company take into account its structural subordination to those of the operating bank subsidiary; therefore, it is rated one notch below the comparable instruments issued by the Bank. This notching practice recognizes that almost all assets and revenues of the organization are held or received by the Bank subsidiary. The Holding Company, however, is largely dependent on its own limited resources and on dividends from the Bank subsidiary; these could be curtailed if regulators perceive a curtailment is needed to safeguard the viability of the Bank under their supervisory control. As a result, the long-term rating of the Holding Company is rated one notch below that of the Bank.

Furthermore, the Holding Company recently issued unrated preferred shares to the marketplace using the proceeds to purchase unrated non-viable contingent capital (NVCC) preferred shares from Equitable Bank. In the event that a conversion to common equity was triggered by the regulator for the Bank’s NVCC preferred shares, the Holding Company Group would likely be forced to cease dividends on the externally issued preferred shares.

Equitable Bank has a very material exposure to the Canadian residential mortgage market. Any slowdown in this market may slow earnings generation, while a downturn in the residential mortgage market could hurt asset quality indicators and ultimately have an impact on provisioning levels.

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.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (June 2015), Rating Bank Capital Securities - Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015) and DBRS Criteria: Support Assessment for Banks and Banking Organisations (March 2015), which can be found on our website under Methodologies.

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