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

DBRS Limited (DBRS) confirmed the Long-Term Senior Debt rating of Manulife Bank of Canada (Manulife Bank or the Bank) at A (high). DBRS has also assigned Long- and Short-Term Issuer Ratings of A (high) and R-1 (middle), respectively, to Manulife Bank, and a Long-Term Deposits rating (previously part of the Long-Term Deposits and Senior Debt rating line) of A (high). The Short-Term Debt has been renamed the Short-Term Instruments and is confirmed at R-1 (middle). All trends are Stable.

The confirmation of 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. 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 is equalized with MLI’s Unsecured Subordinated Debentures rating of A (high).

DBRS has undertaken the various rating actions as part of a global process to ensure consistency of rating categories and terminology and to harmonize bank rating nomenclature for senior long- and short-term ratings globally (please see the rating table at the end of this press release for full details of these actions). DBRS notes that these actions and name changes are not changes in actual rating levels. DBRS further notes that the separation of the Debt and Deposit ratings considers that these liabilities could be rated at different levels in some countries in the future. At this stage, DBRS is not changing its ratings of bank deposits relative to senior deposits but will continue to monitor this issue closely.

The support assessment and the rating for the Bank reflect several considerations: First, the Bank is an important subsidiary that enables MLI to provide banking products and services to its clients and is an integral 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 MLI’s product suite 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, which provides some assurance that any issues arising with the Bank or MLI would be appropriately addressed from a regulatory perspective. Fourth, the Bank is important but modest in scale relative to MLI, so that any need for support for the Bank could be met promptly by MLI, which is a strong credit.

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 that were a priority in 2016. Capital levels remain strong even as the Bank took measures through a dividend repatriation strategy in recent years to reduce what it considered excess capital.

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 though increasing range of key products. In order to compete more effectively by improving the customer experience, the Bank has chosen to embark on a number of new initiatives, including expanding its product suite, enhancing its digital offerings, investing in customer-facing technology, increasing its ABM network and expanding distribution. These new initiatives have led to higher-than-usual expenses in the past two years. Nonetheless, 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 in the low interest rate environment through lower funding costs; however, net income has declined slightly because of higher expenses resulting from strategic spending, infrastructure development and compliance costs. The Bank’s recent emphasis on expanding its National Housing Act mortgage-backed securities program has helped it maintain its spread income. However, it faces some challenges, including a potential slowdown in mortgage growth. Alberta losses have been manageable, which can be attributed to the Bank’s strong underwriting.

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, or 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 (May 2017) and Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (December 2016), which can be found on our website under Methodologies.

Lead Analyst: Stewart McIlwraith, Senior Vice President, Head of Insurance – Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings

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.

For more information on this credit or on this industry, visit www.dbrs.com.