DBRS Morningstar Changes Trends on Manulife Bank of Canada A (high) Ratings to Positive from Stable

DBRS, Inc. (DBRS Morningstar) changed the trends on all long-term ratings of Manulife Bank of Canada (Manulife Bank or the Bank) to Positive from Stable. DBRS Morningstar also confirmed all the ratings of Manulife Bank, including the Bank’s Long-Term Issuer Rating at A (high) and Short-Term Issuer Rating at R-1 (middle). The trends on the short-term ratings of the Bank are Stable.

KEY RATING CONSIDERATIONS
The change in trend on Manulife Bank’s long-term ratings reflects the change in trend to Positive from Stable on The Manufacturers Life Insurance Company’s (MLI; rated AA (low) with a Positive trend by DBRS Morningstar) ratings. DBRS Morningstar’s rating assessment on the Bank is driven primarily by the Support Assessment (SA) of SA1, reflecting the expectation of timely internal support from its parent, MLI. The one-notch rating differential between MLI and Manulife Bank reflects full ownership of the Bank and the relative importance of the Bank to MLI. MLI has a Financial Strength Rating of AA (low) with Positive trend by DBRS Morningstar.

RATING DRIVERS
Positive rating pressure would likely be linked to improvement in MLI’s long-term debt ratings. Alternatively, a downgrade of MLI’s ratings would also likely negatively affect Manulife Bank’s ratings. In addition, any indication that potential support from MLI has been reduced or is not sufficiently reliable could affect DBRS Morningstar’s SA and potentially have a negative impact on the Bank’s ratings.

RATING RATIONALE
The SA 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 supports their individual franchises. The Bank represents an attractive means of strengthening MLI’s product suite and enhancing its relationship with its advisor channel and clients, while providing an opportunity for cross-selling. Second, the Bank is also linked to MLI through the significant integration of the Bank with MLI’s branding, distribution through its financial advisors, shared services and information technology systems. Third, the Bank and MLI have a common prudential regulator, the Office of the Superintendent of Financial Institutions, which provides some assurance that significant issues arising at the Bank or MLI would be addressed from a regulatory perspective. Fourth, the Bank is important, but modest, in scale relative to MLI, so any need for support for the Bank could be met in a timely manner by MLI.

On a stand-alone basis, Manulife Bank continues to generate good underlying earnings that are driven by spread income, while incurring minimal credit losses as a result of the strong asset quality of its primarily residential real estate–secured lending book. The Bank’s funding and liquidity capabilities have broadened over the past several years, with a diversified funding profile split between wholesale funding issuances, including securitization programs, and an expanding suite of retail deposit products. The Bank is also maintaining a good capital cushion above regulatory requirements at the Bank.

Challenges for the Bank include its reliance on a relatively narrow range of key products and its reliance on spread income, which is generally less stable than fee-based sources of income. The Bank is focused on several initiatives, including expanding its product suite, enhancing customer-facing online and app-based technologies, strengthening its ATM network through strategic distribution partnerships, expanding distribution to compete more effectively and improving the customer experience. While these initiatives have led to higher expenses in the past four years, the Bank has been able to absorb these costs from its internally generated earnings.

Notes:
The applicable methodologies are Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (September 2019) and Global Methodology for Rating Banks and Banking Organisations (June 2019), which can be found on our website under Methodologies & Criteria.

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 primary sources of information used for this rating include company documents and company financials. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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.

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