DBRS Confirms CIBC Mellon Trust Company at AA (low) with a Stable Trend

DBRS Limited (DBRS) confirmed the ratings of CIBC Mellon Trust Company (CMT or the Company), including the Company’s Long-Term Issuer Rating of AA (low) and Short-Term Issuer Rating of R-1 (middle). The trend on all ratings is Stable. DBRS has assigned a support assessment (SA) of SA1, which reflects the expectation of continued support from CMT’s most closely aligned parent, The Bank of New York Mellon (BNY Mellon; rated AA/R-1 (high), Stable by DBRS).

KEY RATING CONSIDERATIONS
Although the Company is strong intrinsically, especially given its scale, deep service offering and technologically advanced operating and risk management platforms, CMT’s ratings primarily reflect BNY Mellon’s ownership. DBRS views CMT’s businesses as being core to BNY Mellon. DBRS also anticipates that support would be provided by Canadian Imperial Bank of Commerce (CIBC), which is CMT’s other parent. The one-notch differential in ratings between CMT and BNY Mellon reflects the lack of an explicit guarantee from BNY Mellon. As a supported rating with an SA1 designation, CMT’s ratings would typically move in tandem with BNY Mellon’s rating.

RATING DRIVERS
Given that CMT’s ratings primarily reflect BNY Mellon’s 50% ownership, any positive rating action on BNY Mellon would likely have positive implications on CMT’s ratings. Conversely, any negative ratings action on BNY Mellon would likely have negative implications on CMT’s ratings. Furthermore, any indication of diminished ability or willingness of BNY Mellon or CIBC to support CMT could have a negative impact on CMT’s ratings.

RATING RATIONALE
CIBC Mellon is one of the largest custodians in Canada, with assets under administration of $1.9 trillion as at December 31, 2017. CIBC Mellon refers to the combined businesses operated within the entities of CMT and its sister company, CIBC Mellon Global Securities Services Company (GSS), which provides a variety of asset services, largely focused on custody, securities lending services, foreign exchange settlement, treasury services, recordkeeping and fund accounting. As one of the largest custodians in Canada, CIBC Mellon’s strong franchise draws from its relationship with its two robust co-owners, BNY Mellon and CIBC. While anticipated support from CIBC remains robust, DBRS views that CIBC Mellon’s business model is more in line with that of BNY Mellon and thus more relevant for DBRS’s rating for the Company. Overall, CIBC Mellon is exclusively focused on the asset servicing needs of national institutional investors and international institutional investors investing within Canada.

CIBC Mellon recorded another year of strong earnings growth in F2017 despite considerable headwinds, including strong competitive pressures and fee compression in a low interest rate environment. For CMT, revenue and earnings growth were slower, as higher interest revenue was mostly offset by higher fees paid to GSS for referral, data processing, records management and other administrative services. DBRS notes that the contribution from non-interest income decreased to 8.7% in F2017 compared with 12.8% in F2016. Positively, CMT continues to demonstrate its ability to manage operating expenses and consistently improving its efficiency ratio over time, with an efficiency ratio at 3.9% in F2017 compared with 4.1% in F2016. In F2018, DBRS expects the Company’s earnings and internal capital generation to remain solid, with challenges remaining as the landscape becomes increasingly more competitive, and thus achieving the same strong historical performance could become more difficult.

CIBC Mellon’s operations are well run with strong risk management practices in place. Managing operational risk is nonetheless the most critical challenge for management due to the nature of extremely high transaction volumes, the magnitude of money being handled, as well as the dependency on the technological functionality of its systems. CIBC Mellon maintains a conservative risk management platform, enhanced by parental oversight by BNY Mellon and CIBC, both of which have risk representatives from their organizations that sit on, and participate in, the Company’s risk committees. DBRS notes that considerable cross-organizational expertise is gained through this risk-management approach. CIBC Mellon maintains a very strong asset-quality position, as the Company does not have a lending portfolio on balance sheet. At CMT, asset risk is primarily reflected in its securities portfolio, which is moderated by the conservative profile of the securities.

The Company’s funding and liquidity profile is strong, underpinned by robust deposit funding and a substantial amount of liquidity in cash and high-quality liquid securities. The high level of liquid securities is driven by the Company’s need to facilitate the day-to-day requests of its clients. CMT’s liquidity level is exceptional, with over 95% of its assets typically in cash or high-quality liquid securities.

DBRS views CMT’s capitalization level as adequate, as its Common Equity Tier 1 and Total Capital ratios were at 29.7% in F2017 and are well above the regulatory minimums of 7.0% (composed of the 2019 all-in minimum ratio plus a conservation buffer) and 10.5%, respectively.

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 methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017), which can be found on dbrs.com under Methodologies.

Lead Analyst: Robert Colangelo, Senior Vice President, Canadian Banking Financial Institutions
Rating Committee Chair: Lisa Kwasnowski, Senior Vice President, Global FIG

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

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