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

DBRS Limited (DBRS Morningstar) confirmed all ratings on 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 DBRS Morningstar’s 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 CREDIT RATING CONSIDERATIONS
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 credit 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 exposure to the Canadian asset-servicing business. On an intrinsic basis, DBRS Morningstar views CMT as strong, reflecting its scale and position in Canada and 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 noncritical entity operating in another jurisdiction with low cross-border risk.

CREDIT RATING DRIVERS
Given that CMT’s ratings primarily reflect its 50% ownership by BNY Mellon, an upgrade to BNY Mellon's ratings would result in an upgrade to CMT’s ratings.

Conversely, a downgrade to BNY Mellon’s ratings 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 to the Company’s ratings.

CREDIT 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 $2.3 trillion in assets under administration as at F2022, CIBC Mellon is exclusively focused on the asset-servicing needs of both national and international institutional investors within Canada.

CIBC Mellon generates strong recurring earnings as it benefits from a relatively stable, fee-based business model. Despite the challenging operating environment, CMT’s net earnings shrank only marginally in F2022 because of operating expenses resulting from higher staffing costs and purchased services from vendors. This was mostly offset by higher revenues supported by core fees and net interest income. DBRS Morningstar expects client momentum and a higher interest rate environment to positively affect CIBC Mellon's earnings in the medium term.

CIBC Mellon’s operational and reputational risks are high because of the immense 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. Handling these risks is the most critical challenge for management. However, 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. CIBC Mellon possesses considerable cross-organizational expertise as both BNY Mellon and CIBC have risk representatives from their organizations who participate and sit on the Company’s risk committees. Moreover, credit risk is minimal, as the Company does not have a lending portfolio on its balance sheet.

The Company’s balance sheet fundamentals remain healthy. CMT’s funding and liquidity profile is underpinned by robust deposit funding and a substantial amount of liquidity in cash and high-quality liquid securities. The Company’s liquidity level is exceptional, with about 94% of its assets typically in cash or high-quality liquid securities. Finally, capital levels remain well above regulatory minimums although the CET1 ratio was reduced to 24.4% in F2022 from 31.1% in the prior year because of the unrealized losses on Fair Value through Other Comprehensive Income securities.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Rating actions on BNY Mellon are likely to have an impact on this credit rating. ESG factors that have a significant or relevant effect on the credit analysis of BNY Mellon are discussed separately at (https://www.dbrsmorningstar.com/issuers/15299).

There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (July 4, 2023; https://www.dbrsmorningstar.com/research/416784).

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 22, 2023; https://www.dbrsmorningstar.com/research/415978). In addition, DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (https://www.dbrsmorningstar.com/research/416784) in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

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

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