DBRS Morningstar Publishes Banks’ Intrinsic Assessment Frameworks

DBRS Morningstar has published Intrinsic Assessment (IA) Frameworks of 104 publicly rated banks and financial institutions, providing detailed disclosure on the key factors underlying the banks’ IAs.

As communicated in the press release of 19th July regarding the finalisation of the Global Methodology for Rating Banks and Banking Organisations, the updated Methodology separates the quantitative and qualitative elements of a bank’s fundamental creditworthiness through a separate Scorecard (quantitative) and Grids (qualitative). The output of the Scorecard and Grids is combined to generate a three-notch Intrinsic Assessment Range (IAR), which guides the rating committee process. The main outputs are laid out in each bank’s published IA Framework, and a more detailed explanation can be found in the published Methodology. To help with the comparability we are publishing Scorecard data as of end-2020, except for those banks whose IA Framework has already been published with H1 2021 financial data.

The changes to the Methodology have not led to any changes to ratings as the underlying analytical approach remains essentially unchanged. Most banks’ IAs fall within the three-notch IAR generated by the Methodology and, consequently, their ratings have been unaffected by the changes in the Methodology. The published IA Frameworks have been separated into three documents covering North America, Europe, and Other Regions.

Five banks’ IAs fall outside their IAR: Home Trust Company, NatWest Group Plc, Equitable Bank, National Bank of Canada and Regions Bank. The rationale for these banks is provided below:

Home Trust Company:
Home Trust Company (Home or the Trust)’s IA was confirmed at BBB (low) on March 26, 2021, with a Stable trend on all short-term and long-term ratings. Home’s IA is one notch below its three-notch IAR under the updated Methodology.

The differential between Home’s IA and the IAR reflects the fact that as one of Canada’s leading lenders in the Alt-A mortgage space, Home has a concentrated business model. The Scorecard incorporates Home’s strong earnings and capitalization in addition to a history of low impairments and charge-offs. However, the Building Block Assessments in the Grids are lower than the Scorecard due to the limited breadth of products which confines revenues streams versus other regional banks and places a drag on the Earnings Power grid. In addition, a lower grid grade for Risk Profile takes into consideration Home’s relatively riskier mortgage loan portfolio which contains a higher proportion of Alt-A mortgages versus bank peers as does the lower grade for Funding and Liquidity since Home is dependent on brokered deposits. Of note, a liquidity event that stemmed from a crisis of confidence in 2017 put extreme pressure on Home’s overall credit profile.

NatWest Group Plc:
NatWest Group Plc (NatWest or the Group)’s IA was raised to A (low) on September 27, 2021, and the trend on the long-term ratings reverted to Stable. NatWest’s IA is one notch below its three-notch IAR under the updated Methodology.

The differential between NatWest’s IA and the IAR reflects the fact that despite the progress made by the Group, it is yet to establish a stable track record in profitability, and this lack of track record is incorporated into the final rating assigned to the Group. The Scorecard incorporates both the Group’s robust balance sheet data and its past years of losses, but the Building Block Assessments in the Grids are also lower than the Scorecard due to the drag from legacy issues on the Group’s Franchise Strength and Risk Profile.

Equitable Bank:
Equitable Bank (Equitable or the Bank)’s IA was confirmed at BBB on June 4, 2021, with a Stable trend on all long-term ratings. Equitable’s IA is one notch below its three-notch Intrinsic Assessment Range (IAR) under the updated Methodology.

The differential between Equitable’s IA and the IAR reflects the fact that Equitable is Canada’s largest mortgage lender in the Alt-A market niche. The Scorecard incorporates Equitable’s strong earnings and capitalization in addition to a history of low impairments and charge-offs. However, the Building Block Assessments in the Grids are lower than the Scorecard due to the limited breadth of products and revenues streams versus other regional banks which places a drag on the Franchise Strength and Earnings Power grids. In addition, a lower grid grade for Risk Profile takes into consideration Equitable’s relatively riskier mortgage loan portfolio which contains a higher proportion of Alt-A mortgages versus bank peers.

National Bank of Canada:
National Bank of Canada (National or the Bank)’s IA was confirmed at A (high) on April 30, 2021, with a Positive trend on all short and long-term ratings. National’s IA is one notch below its three-notch IAR under the updated Methodology.

The differential between National’s IA and the IAR reflects the fact that the Bank has been on a positive trajectory over the last few years; however, concerns around the overall economic landscape have tempered expectations since the onset of coronavirus pandemic particularly in view of the Bank’s Canadian centric franchise. The Scorecard incorporates National’s strong earnings, funding and capitalization in addition to a history of low impairments and charge-offs. The Building Block Assessments in the Grids are higher than the Scorecard as National has successfully continued to expand its footprint in targeted markets and niches across Canada. In addition the Bank’s strong performance over the last few years, with Personal and Commercial and Wealth Management now contributing a larger portion of earnings, has placed National at the top of its peer range in terms of profitability metrics. As such National’s grids provide an uplift from the Scorecard, particularly for Earnings Power and Risk Management.

Regions Bank:
Regions Bank’s (Regions or the Bank) IA was confirmed at “A” on November 19, 2020, with a Stable trend on all short and long-term ratings. The Bank’s IA is one notch below its three-notch IAR under the updated Methodology.

The differential between the IA and the IAR reflects the significant challenges Regions faced with asset quality from the 2008 Financial Crisis . Following efforts to de-risk the loan portfolio and enhance risk management, Regions’ recent asset quality indicators have outperformed our expectations.