DBRS Morningstar Changes Trends on Canadian Western Bank’s Long-Term Ratings to Negative, Confirms Ratings at A (low)

DBRS Limited (DBRS Morningstar) revised the trend on all long-term ratings of Canadian Western Bank (CWB or the Bank) to Negative from Stable and maintained the Stable trend on all short-term ratings. DBRS Morningstar confirmed the Bank’s ratings as follows:

-- Long-Term Issuer Rating at A (low)
-- Short-Term Issuer Rating at R-1 (low)
-- Long-Term Deposits at A (low)
-- Long-Term Senior Debt at A (low)
-- Short-Term Instruments at R-1 (low)
-- NVCC Subordinated Debt at BBB (low)
-- NVCC Preferred Shares at Pfd-3

The Bank’s Intrinsic Assessment of A (low) and Support Assessment of SA3 are unchanged. The SA3 designation, which reflects no expectation of timely external support, results in the final rating being equivalent to the Intrinsic Assessment.

KEY RATING CONSIDERATIONS
The Negative trend reflects the anticipated adverse impact on CWB from (1) the Coronavirus Disease (COVID-19) pandemic that is causing an abrupt and severe drop in economic activity across Canada (rated AAA with a Stable trend by DBRS Morningstar) and (2) deterioration in the Province of Alberta’s (Alberta; rated AA (low) with a Negative trend by DBRS Morningstar) economy caused by a sharp decline in oil prices. Alberta’s economy relies heavily on oil production, and there is considerable uncertainty surrounding when, and to what extent, oil prices will recover. Nevertheless, while CWB’s direct oil and gas exposure sits at only 1% of its total loan portfolio, the pandemic will likely pressure all asset classes. While CWB primarily deals with smaller scale projects, DBRS Morningstar is wary of CWB’s relatively large real estate project finance portfolio, which forms 12% of the total loan portfolio, and how it will perform in this environment. The Negative trend also considers the uncertainty surrounding the duration of business closures across Canada instituted to halt the spread of the coronavirus.

RATING DRIVERS
Given the Negative trend, an upgrade is unlikely at this time. The trend could revert back to Stable if the impact of the current economic crises on CWB’s earnings and credit quality metrics is manageable.

Conversely, material losses in the loan portfolio as a result of the oil price shock and a longer than expected adverse impact of coronavirus, or significant pressures on funding and liquidity, could result in a ratings downgrade.

RATING RATIONALE
With assets of $31.6 billion as of January 31, 2020, CWB is Canada’s eighth-largest Schedule I bank by assets specializing in commercial lending, leasing, and franchise finance to middle-market clients. In addition, CWB is active in the Alt-A residential mortgage space through its CWB Optimum Mortgage business, which represents 10% of the total loan book. Although the Bank has been actively expanding into eastern Canada over the last decade, its primary commercial lending activities remain within its traditional markets in western Canada. Given the aforementioned crises, DBRS Morningstar is particularly concerned about the Bank’s exposure to Alberta, which makes up 32% of CWB’s loan portfolio, and was recently downgraded with a Negative trend by DBRS Morningstar.

CWB has proportionally higher exposure to commercial loans than its Canadian bank peers as they form 80% of the Bank’s portfolio, with the real estate sector making up 31% of total loans. Although these loans are mostly secured, unlike larger bank peers who have a proportion of unsecured loans, given the current economic situation, higher credit impairments are likely, particularly as middle-market borrowers face forced business closures and disruptions. In addition, Alt-A borrowers who have lost their income might have a harder time renewing their mortgages, which tend to have shorter terms than prime mortgages, thus creating further pressure on CWB’s personal loans. All in all, despite the Bank’s cost containment and efficient operations, the economic deterioration will likely depress revenue and profitability.

DBRS Morningstar views CWB’s funding and liquidity positions as stable, especially given the Bank’s access to the various government liquidity programs; however, tightening market conditions are widening spreads, making access to wholesale and brokers deposits more expensive. Furthermore, although capitalization is above regulatory requirements with the a Common Equity Tier 1 ratio of 9.1% as of Q1 2020, pressures on profitability and a potential increase in credit losses could affect the Bank’s ability to maintain capital at current levels.

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

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is Global Methodology for Rating Banks and Banking Organisations (June 11, 2019).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.dbrsmorningstar.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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

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

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