DBRS Morningstar Confirms Ratings on CIBC Mellon Trust Company at AA, Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the ratings of CIBC Mellon Trust Company (CMT or the Company), including the Company’s Long-Term Issuer Rating at AA and Short-Term Issuer Rating at R-1 (high). The trend on all ratings is Stable. The Support Assessment (SA) is SA1, which reflects the expectation of continued and timely 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
Ranking as one of the largest custodians in Canada, CMT's strong franchise reflects its relationship with its two robust co-owners, BNY Mellon and Canadian Imperial Bank of Commerce (CIBC; rated AA/R-1 (high) with a Stable trend by DBRS Morningstar). Although anticipated support from both owners remains likely, DBRS Morningstar views the Company’s ratings as primarily driven by BNY Mellon, which is the most closely aligned parent, as CMT’s business is core to BNY Mellon and provides it with exposure to the Canadian asset-servicing business. On an intrinsic basis, DBRS Morningstar views CMT as strong, reflecting its scale and position in Canada, its low-risk balance sheet, as well as its deep service offering. In addition, CMT extensively leverages BNY Mellon's technology and operating platform to deliver its services to clients. 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.

RATING DRIVERS
Given that CMT’s ratings primarily reflect its 50% ownership by BNY Mellon, an upgrade of BNY Mellon's ratings would result in an upgrade to the ratings of CMT. Conversely, a ratings downgrade of BNY Mellon would result in a downgrade to CMT's ratings. In addition, any indication of a reduced ability or willingness to support CMT by BNY Mellon would result in a downgrade of the Company’s ratings.

RATING RATIONALE
CIBC Mellon represents the combination of two legal entities: CMT and its sister company, CIBC Mellon Global Securities Services Company (GSS). GSS provides a variety of asset services that are largely focused on custody, securities lending services, foreign exchange processing and settlement, treasury services, fund administration, and fund accounting. Although CMT and GSS are separate legal entities, they operate as a single firm, which is how the market views them. With more than $2 trillion in assets under administration, CIBC Mellon is exclusively focused on the asset servicing needs of both national and international institutional investors within Canada.

CIBC Mellon has generated strong recurring earnings, as it benefits from a relatively stable, fee-based business model. In F2019, CMT's net income was negatively affected by lower capital markets volumes, which was partially offset by higher investment yields, volume growth, and net new client wins. Consistent with this decline in earnings, CMT's return on equity in F2019 declined to 6.2% compared with the prior year. Continued competitive pressures combined with fee compression and the low interest rate environment may negatively affect CIBC Mellon's earnings in the near to intermediate term. DBRS Morningstar notes that CIBC Mellon has remained disciplined with its pricing and as a result, continues to attract new clients even from those competitors that price more aggressively in the market.

Operational and reputational risks are high for CIBC Mellon due to the extremely high volume of transactions that are processed. The operational risk inherent in this business is further elevated, as CIBC Mellon depends on the technological functionality of its systems when servicing its clients. Managing these risks is the most critical challenge for management. These risks are mitigated, as CIBC Mellon has put in place a conservative risk management framework, which is further enhanced by oversight from both of its parent companies. Considerable cross-organizational expertise is gained as both BNY Mellon and CIBC have risk representatives from their organizations that participate and sit on the Company’s risk committees.

Credit risk for the Company is limited, as on balance sheet client receivables relate to amounts owing from its clients to facilitate settlement activity. These balances only represented less than 3% of total assets as at October 31, 2019. The securities portfolio represents almost 90% of total assets and is conservative, as it is largely composed of high credit quality, fixed-income securities issued by government entities, and financial institutions. DBRS Morningstar notes that CMT’s investment policy prohibits investments in equity securities or any security that is not considered highly liquid or marketable.

DBRS Morningstar views the Company's funding and liquidity profile as very strong underpinned by robust deposit funding. DBRS Morningstar views these deposits as a stable funding source since they are typically originated from institutions and governments. In addition, CMT holds a substantial amount of liquidity in cash and short-term securities, which is largely driven by the Company’s need to facilitate the day-to-day transactions of its clients. At the end of F2019, almost 97% of total assets represented cash or high-quality liquid securities.

CMT's capitalization is strong, as the Company's Common Equity Tier 1 and Total Capital ratios as at October 31, 2019, were 34.9%, which is significantly above the regulatory minimums. Moreover, the Company's leverage ratio was 6.3%, which is up from 4.6% in the prior year, largely reflecting a change in the Office of the Superintendent of Financial Institutions’ calculation methodology during the Coronavirus Disease (COVID-19) pandemic. On a relative basis, the leverage ratio remains CMT's most constraining capital metric, reflecting the low risk nature of the asset-servicing business combined with the high level of liquid securities that must be maintained by the Company. Overall, DBRS Morningstar views the amount of equity carried on CMT’s balance sheet as sound.

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 the 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.

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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