DBRS Confirms Canadian Western Bank Rating at A (low), Stable Trend

DBRS Limited (DBRS) has today confirmed Canadian Western Bank’s (CWB or the Bank) Issuer Rating and Deposits & Senior Debt rating at A (low), Short-Term Instruments rating at R-1 (low), Subordinated Debt rating at BBB (high) and NVCC Preferred Share rating at Pfd-3. All trends remain Stable.

CWB’s franchise is supported by a niche strategy using primarily tangible-asset-secured relationship-based lending, largely in Western Canada, with a national Alt-A mortgage and a national leasing business adding some diversity. Reflecting this franchise, earnings are relatively steady. Earnings benefit from a favourable efficiency ratio that reflects the Bank’s business mix and operating model. Capitalisation benefits from good internal capital generation. Challenges remain though, particularly with some funding limitations and concentration in the loan book, both geographically (Alberta and British Columbia) and by industry (commercial, construction and real estate lending).

Like its Canadian peers, the Bank has exposure to Canadian real estate-supported lending. A slowdown in the real estate markets may slow earnings generation and could hurt asset quality indicators, which ultimately may have an impact on provisioning levels. Funding diversification at CWB has been slowly improving over the past several years, but the Bank continues to rely more heavily on brokered deposits relative to its Canadian banking peers. The Bank has strong asset quality as evidenced by its history of low write-off rates. Capital levels are generally viewed as strong.

Following a strategic assessment that CWB began in 2014 under which it decided to focus on businesses that complement its core banking business relationships, the Bank sold two businesses in Q3 2015 that were not aligned with this strategic direction. The stock transfer business of Valiant Trust Company (a deposit-taking trust company engaged in corporate trust, stock transfer and employee plan services) and Canadian Direct Insurance Incorporated (which offers auto and home insurance to individuals in Alberta and British Columbia, primarily through the Internet and call centres) were sold for a net gain of $107 million, resulting in a 60 to 70-basis point increase in the various risk-based regulatory capital ratios.

While greater geographic diversification or an improved funding profile could have a positive impact on DBRS’s assessment of CWB’s credit quality, negative influences could also appear in the event of evidence of commercial loan portfolio losses that begin to affect capital ratios or an increase in risk appetite or notable weakening of asset quality. Additionally, poor execution of the upcoming core banking system implementation, deterioration in the Bank’s efficiency and ongoing profitability, execution of a large acquisition that increases the Bank’s risk profile, or poor integration execution of an acquisition could also put negative pressure on the rating.

Under DBRS’s methodology, CWB’s long-term deposit and senior debt rating is based on an intrinsic assessment of A (low) and a support assessment of SA3. The SA3 rating, which reflects the expectation of no timely external support, results in the final rating being at the same level as the intrinsic assessment.

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 methodology and primary criteria are the Global Methodology for Rating Banks and Banking Organisations (June 2015), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015) and DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2015), which can be found on the DBRS website under Methodologies.