DBRS Morningstar Upgrades Ratings on Manulife Bank of Canada to AA (low), Trend Now Stable

DBRS Limited (DBRS Morningstar) upgraded the long-term ratings of Manulife Bank of Canada (Manulife Bank or the Bank) to AA (low) from A (high) and confirmed the Bank’s short-term ratings at R-1 (middle). The trends on all ratings are now Stable. The Support Assessment (SA) remains at SA1, which reflects the expectation of timely internal support from The Manufacturers Life Insurance Company (MLI or the Parent; rated AA with a Stable trend by DBRS Morningstar).

KEY RATING CONSIDERATIONS
As a 100% owned, strategically important subsidiary of MLI, Manulife Bank’s ratings are primarily driven by the Parent. On an intrinsic basis, DBRS Morningstar views Manulife Bank as strong, reflecting the Bank’s position as the ninth-largest bank in Canada, its innovative product offerings, as well as the key investments being made in technology. As per the DBRS Morningstar insurance methodology, the one-notch rating differential between MLI and Manulife Bank reflects the standard notching for a non-insurance subsidiary.

RATING DRIVERS
Given the recent upgrade of Manulife Bank, DBRS Morningstar does not see upward ratings pressure over the intermediate term. Over the longer term, as the Bank’s ratings primarily reflect MLI’s ownership, any ratings upgrade of MLI would result in a ratings upgrade of Manulife Bank. Conversely, a downgrade of the Parent’s ratings would also result in a ratings downgrade of Manulife Bank. In addition, any indication of a reduced ability or willingness of MLI to support Manulife Bank would result in a ratings downgrade.

RATING RATIONALE
The SA and the ratings for the Bank reflect Manulife Bank’s position as a strategically important subsidiary that enables MLI to provide banking products and services to its clients. The Bank is an integral element of MLI’s strategy in Canada, with the mutually beneficial relationship between the two entities supporting their individual franchises. The Bank’s innovative product suite strengthens MLI’s product offering while enhancing its relationship with its clients and the advisor channel. In addition, Manulife Bank is linked to its Parent through the significant integration of the Bank with MLI’s branding, distribution through its financial advisors, as well as shared services and information technology systems. Both Manulife Bank and MLI are regulated by the Office of the Superintendent of Financial Institutions (OSFI), which provides some assurance that significant issues arising at the Bank or MLI would be addressed from a regulatory perspective. The ratings for Manulife Bank are also supported by DBRS Morningstar’s expectation of timely internal support. Given that the Bank is modest in scale relative to MLI, DBRS Morningstar expects that support would be met by MLI in a timely manner.

Manulife Bank, on a standalone basis, has generated solid recurring earnings over the last few years, which have been sufficient to absorb losses. As the Bank remains reliant on net interest income, earnings could be pressured as a result of the very low interest rate environment driven by the Coronavirus Disease (COVID-19) pandemic. With an efficiency ratio of 54.2% in F2019, operating efficiency has been strong for Manulife Bank, largely reflecting its low-cost distribution structure, although the Bank continues to invest significantly in strategic growth initiatives. These investments in technology could negatively affect the efficiency ratio in the near term. Overall, the Bank has generated solid returns, with a reported return on average equity of 12.5% in F2019.

Overall, DBRS Morningstar views Manulife Bank's risk profile as conservative, reflecting the Bank's solid track record of credit performance as most credit metrics remain at relatively low and manageable levels. As a federally regulated financial institution, Manulife Bank has implemented a comprehensive enterprise risk management framework. The Bank nationally sources a portion of mortgages through the mortgage broker channel, which heightens operational risk; however, this risk appears to be well managed.

Manulife Bank has a strong funding and liquidity profile, which is underpinned by a high level of retail deposits (approximately 68% of its overall funding). This is complemented through the Bank’s participation in securitization through the Canada Mortgage Bonds Program and National Housing Act Mortgage-Backed Securities programs. In addition to unsecured wholesale funding, Manulife Bank also uses secured wholesale funding sources such as asset-backed securities and bank-sponsored asset-backed commercial paper, although these sources only represented 8% of its overall funding at the end of F2019.

Manulife Bank’s capitalization levels remain comfortably above regulatory minimums. In Q1 2020, the Bank's Common Equity Tier 1 (CET1) ratio was 14.3%, while the Tier 1 and Total Capital ratios were 17.0% and 17.1%, respectively. These strong capital ratios are a result of Manulife Bank's high-quality capital base, with common equity and retained earnings comprising 84% of the capital base. This provides the Bank with a sufficient capital cushion to cover potential losses arising from the impact of the pandemic. DBRS Morningstar notes that the Bank’s capital levels continue to compare favorably with similar ratios of the small to mid-sized Canadian banks.

The Grid Summary Grades for Manulife Bank are as follows: Franchise Strength – Good; Earnings Power – Good; Risk Profile – Good; Funding & Liquidity – Strong; Capitalization – Strong/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 applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (June 8, 2020):, https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations) and Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (July 21, 2020):, https://www.dbrsmorningstar.com/research/364260/global-methodology-for-rating-life-and-pc-insurance-companies-and-insurance-organizations), which can be found on our website under Methodologies & Criteria..

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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