DBRS Morningstar Upgrades CIBC Mellon Trust Company to AA; Changes Trends to Stable from Positive

DBRS Limited (DBRS Morningstar) upgraded the ratings of CIBC Mellon Trust Company (CMT or the Company), including the Company’s Long-Term Issuer Rating to AA from AA (low) and Short-Term Issuer Rating to R-1 (high) from R-1 (middle). DBRS Morningstar changed all trends to Stable from Positive. DBRS Morningstar 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 (high)/R-1 (high) with a Stable trend by DBRS Morningstar).

KEY RATING CONSIDERATIONS
CMT’s ratings primarily reflect the ownership of BNY Mellon, as DBRS Morningstar views CMT’s business as being core to BNY Mellon. CMT is viewed by DBRS Morningstar as strong intrinsically, particularly given its scale and position as one of the largest custodians in Canada, the Company’s deep service offering, as well as its investments in technology and advanced risk management platforms. In addition, DBRS Morningstar also anticipates that support would be provided by CMT’s other parent, Canadian Imperial Bank of Commerce (CIBC; rated AA with a Stable trend by DBRS Morningstar). The one-notch differential in ratings between the Company and BNY Mellon reflects typical notching for a non-critical entity operating in another jurisdiction with low cross-border risk. CMT’s ratings would typically move in tandem with BNY Mellon’s rating given that it is a supported rating with an SA1 designation.

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 for CMT. Conversely, any negative ratings action on BNY Mellon would likely have negative implications on CMT’s ratings. Furthermore, any indication of a reduced willingness of BNY Mellon or CIBC to support CMT could have a negative impact on the Company’s ratings.

RATING RATIONALE
CIBC Mellon ranks as one of the largest custodians in Canada, with almost $2.0 trillion in assets under administration as at October 31, 2018. CIBC Mellon represents the combination of two legal entities, CMT and its sister company, CIBC Mellon Global Securities Services Company (GSS), which provides a variety of asset services that are largely focused on custody, securities lending services, foreign exchange settlement, treasury services, recordkeeping and fund accounting. CIBC Mellon’s strong franchise reflects its relationship with its two robust co-owners, BNY Mellon and CIBC. While anticipated support from CIBC remains likely, DBRS Morningstar views CIBC Mellon’s business model as more in line with that of BNY Mellon because they are both custodians. Thus, DBRS Morningstar views BNY Mellon as more relevant for rating for the Company. Overall, CIBC Mellon is exclusively focused on the asset servicing needs of both national and international institutional investors within Canada.

DBRS Morningstar views CIBC Mellon’s earnings power as strong given that it benefits from a relatively stable, fee-based business model. In F2018, CIBC Mellon recorded another strong year, with earnings driven by net client wins, volume growth and the favourable impact of past interest rate increases, which were partially offset by fee reductions. While CIBC Mellon has benefitted from recent interest rate increases by the Bank of Canada, given the uncertainty around future interest rate hikes, DBRS Morningstar notes that this could negatively affect earnings at CIBC Mellon.

While CIBC Mellon has a strong risk profile, operational and reputational risk are high given the extremely high volume of transactions being processed, as well as the magnitude of money being handled. In addition, CIBC Mellon depends on the technological functionality of its systems when servicing its clients, which further elevates the level of operational risk inherent in this business. Managing these risks is the most critical challenge for management. To mitigate these risks, CIBC Mellon has maintained a conservative risk management framework, which is enhanced by oversight from both its parent companies, as they have representatives that participate in the Company’s risk committees. Credit risk is limited for the Company as any client receivables on its balance sheet relate to amounts owing from its clients to facilitate settlement activity. These balances represent only 1.9% of total assets as at October 31, 2018. CMT is subject to asset risk through its securities portfolio, which represents 80% of total assets; however, the profile of this portfolio is deemed to be conservative as the Company’s investment policy ensures that the portfolio of fixed-income securities is of high credit quality, normally consisting of government entities and financial institutions. Moreover, the investment policy prohibits any investments in equity securities or any security that is not considered to be highly liquid or marketable.

The Company’s funding and liquidity profile is viewed by DBRS Morningstar as strong given that it is underpinned by robust deposit funding and a substantial amount of liquidity held by CMT in cash and short-term securities. This high level of liquid securities is driven by the Company’s need to facilitate the day-to-day transactions of its clients, with over 95% of CMT’s assets typically in cash or high-quality liquid securities.

DBRS Morningstar views CMT’s capitalization as sound, with its Common Equity Tier 1 and Total Capital ratios of 27.8% in F2018, which are well above the regulatory minimums of 7.0% (comprising the 2019 all-in minimum ratio plus a conservation buffer) and 10.5%, respectively.

The Grid Summary Grades for CMT are as follows: Franchise Strength – Strong; Earnings Power –Strong; Risk Profile – Very Strong/Strong; Funding & Liquidity – Very Strong/Strong; Capitalization – Strong/Good.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is 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 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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