DBRS Confirms Ratings on National Bank of Canada, Negative Trends

DBRS Limited (DBRS) has today confirmed the ratings on National Bank of Canada (National, NBC or the Bank) and its related entities, including the Deposits & Senior Debt rating of AA (low) and the Short-Term Instruments rating of R-1 (middle). Trends on senior long-term debt ratings and older-style subordinated debt remain Negative, while short-term instruments and other capital instruments whose ratings are notched down from the Bank’s intrinsic assessment continue to have Stable trends. National continues to maintain its strong regional franchise in Québec, with particular emphasis on its retail, small business and commercial banking units as well as its Wealth Management business and national Financial Markets franchise. While strong market shares in the home province remain a key strength of the Bank, the ratings reflect the Bank’s regional concentration in Québec.

NBC’s long-term deposits and Senior Debt rating, at AA (low), is composed of an intrinsic assessment of A (high) and support assessment of SA2 (reflecting the expectation of systemic and timely external support by the Government of Canada). The SA2 ranking results in a one-notch benefit to the Deposits & Senior Debt ratings. The Negative trend reflects DBRS’s view that anticipated changes in Canadian legislation and regulation mean that the potential for timely systemic support for these systemically important institutions is declining and is likely to eventually result in a change in DBRS’s support assessment to SA3 from SA2 for this institution. At the same time, DBRS notes that additional protection for non-bail-in-able debt and deposits may eventually be provided by bail-in-able senior debt under the anticipated bail-in debt regime. DBRS will assess the impact of the “Taxpayer Protection and Bank Recapitalization Regime” rules as more details are made available by the authorities.

National has a viable strategy as a growing wealth management provider and as a more traditional super-regional bank predominantly based in Québec. The Bank is strong across most business lines in the province, particularly in small business lending, commercial banking and wealth management. Additionally, the Bank has a full-service national investment banking franchise, which helps to diversify revenues both by product line and geographically outside of Québec; however, this has resulted in generally higher proportional exposure to its capital markets operations than its peer group. The high level of relative capital market contributions exposes the Bank to the volatility that characterizes this line of business.

National continues to deliver excellent returns, with return on common equity in the high teens. While efficiency continues to be at the higher end versus its domestic peers, reflective of the Bank’s size and business mix, the earnings easily cover provisions with a decent degree of diversity, adding to the Bank’s ability to weather tougher times.

National’s overall risk profile is very strong with a diversified portfolio and limited direct exposures to oil and gas (O&G). As with its peers National has 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. Direct exposure to O&G is manageable within a well-diversified portfolio. Asset quality within the Canadian market will be determined by the extent to which any deteriorating consumer credit quality trends materialize in the Canadian market, including potentially as an indirect result of volatility in O&G. At this point, there are no material observable problems.

Delivering results from National’s “one client, one bank” vision remains an ongoing effort. The Bank has taken initiatives to maximize cross-selling potential by re-aligning its organizational structure, investing in technology to improve data mining capabilities and further developing its client-centric culture. If successful, DBRS believes the Bank stands to generate material organic revenue growth and gain stronger long-term relationships with its clients.

The Bank has a favourable financial risk profile with good liquidity and funding profiles and strong capital ratios.

National’s rating could be positively influenced if the Bank were to improve geographic diversification. In addition to the support and other considerations noted earlier with respect to the Negative trend, other factors with negative rating implications include an increase in risk appetite or notable weakening of asset quality or franchise. Rapid foreign expansion or evidence of increase in risk in capital markets businesses may also have negative rating implications.

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 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 DBRS’s website at www.dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.