DBRS Confirms Ratings on Manulife Bank of Canada at A (high), Stable Trend

DBRS Limited (DBRS) has today confirmed the Long-Term Deposits and Senior Debt rating and the Short-Term Debt rating of Manulife Bank of Canada (Manulife Bank or the Bank) at A (high) and R-1 (middle), respectively. All trends are Stable.

The ratings of Manulife Bank reflects DBRS’s assessment of the support that would be expected from the Bank’s parent The Manufacturers Life Insurance Company (MLI), which has a Financial Strength Rating of AA (low) by DBRS. Under “DBRS Criteria: Support Assessments for Banks and Banking Organisations,” this support is assessed at SA1, indicating a very strong to good likelihood and predictability of timely external support from its parent for this core component of MLI’s Canadian operations. Given this high level of assessed support, the rating of the Bank at A (high) is positioned one notch below the parent’s Financial Strength Rating and equalized with MLI’s Unsecured Subordinated Debentures rating of A (high).

The support assessment and the rating for the Bank reflects several considerations. First, the Bank is an important subsidiary that enables MLI to provide banking products and services to its clients, an important element of MLI’s strategy in Canada. The mutually beneficial relationship between the two organizations implies a high level of commitment. The Bank represents an attractive means of enhancing and broadening Manulife products and strengthening MLI’s relationship with its advisor channel and its clients. Second, the Bank is also linked to MLI through the significant integration of the Bank with MLI’s systems, distribution, management, strategy and branding. Third, the Bank and MLI have a common regulator, the Office of the Superintendent of Financial Institutions (OSFI), which provides some assurance that any issues arising with the Bank would be appropriately addressed from a regulatory perspective. Fourth, the Bank is important, but relatively modest in scale relative to MLI, so that any need for support for the Bank could be met promptly by MLI, a strong credit with ample resources.

Also considered in the analysis is the Bank’s fundamental credit strength, which DBRS views as satisfactory. Manulife Bank has a strong earnings platform, a low risk profile, attractive funding and liquidity and solid capitalization. The Bank’s funding and liquidity capabilities have broadened over the past several years, with a well-diversified funding profile split between a suite of retail products and wholesale funding issuances, including securitization programs. Regulatory capital ratios are strong, and the Bank has adapted well to OSFI’s Liquidity Adequacy Requirements (LAR) guideline, which was finalized in 2015. Capital levels remain strong, even after the Bank recently upstreamed some excess capital to its parent.

The Bank’s challenges include its reliance on spread income, which leaves it exposed to the prevailing low interest rate environment, and its reliance on a relatively narrow, although increasing, range of key products. The Bank is expanding its product suite and enhancing its digital offerings, and has increased its ABM network in order to improve the customer experience. Manulife Bank continues to deliver strong earnings through controlled loan and deposit growth generated by its parent’s sizable independent advisor network, while incurring minimal credit losses as a result of the strong asset quality of its primarily secured lending book. The Bank has maintained margins and earnings in the low interest rate environment. However, risks remain, including a potential increase in Alberta losses and a slowdown in mortgage growth.

RATING DRIVERS
The Stable trend reflects the expectation of ongoing support from MLI. Negative ratings pressure could arise if there is a reduction in perceived support from MLI, as well as if DBRS downgrades MLI’s rating. Conversely, positive ratings pressure could arise, if DBRS upgrades MLI.

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 on the issuer page at www.dbrs.com.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (December 2015), Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (December 2015) and DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016), which can be found on our website under Methodologies.

Lead Analyst: Stewart McIlwraith
Rating Committee Chair: Roger Lister

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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.