Morningstar DBRS Confirms CIBC Mellon Trust Company's Long-Term Credit Ratings at AA, Stable Trends

DBRS Limited (Morningstar DBRS) confirmed all credit 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 trends on all credit ratings are Stable. The Support Assessment (SA) is SA1, which reflects Morningstar DBRS' expectation of continued and timely support from CMT's most closely aligned parent, The Bank of New York Mellon (BNY; rated AA (high)/R-1 (high) with a Stable trend by Morningstar DBRS).

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 and Canadian Imperial Bank of Commerce (CIBC; rated AA/R-1 (high) with a Stable trend by Morningstar DBRS). Although anticipated support from both owners remains likely, Morningstar DBRS views the Company's credit ratings as primarily driven by BNY, which is the most closely aligned parent, as CMT's business is core to BNY and provides exposure to the Canadian asset-servicing business. The one-notch differential in credit ratings between the Company and BNY reflects typical notching for a noncritical entity operating in another jurisdiction with low cross-border risk.

On an intrinsic basis, Morningstar DBRS views CMT's franchise as strong, reflecting its scale and position as well as deep service offering in Canada. The Company generates strong recurring earnings supported by its relatively stable, fee-based business model and low-risk balance sheet. In addition, CMT extensively leverages BNY's technology and operating platform to deliver its services to clients.

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

A downgrade to BNY's credit ratings would result in a downgrade to CMT's credit ratings. In addition, any indication by BNY of reduced ability or willingness to support CMT would result in a downgrade to the Company's credit ratings.

CREDIT RATING RATIONALE

Franchise Strength
CIBC Mellon represents the combination of two legal entities: CMT and its sister company, CIBC Mellon Global Securities Services Company Inc. (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. With about $2.8 trillion in assets under administration as at June 30, 2024, CMT holds a strong market share in Canada and is exclusively focused on the asset-servicing needs of both national and international institutional investors within the country.

Earnings Power
CMT generates strong recurring earnings as it benefits from a relatively stable, fee-based business model. Despite the challenging operating environment, the Company's net earnings grew 8.3% year over year (YOY) to $113.4 million in F2023, supported by higher net interest income, while operating expenses remained broadly flat. As a result, return on average equity increased by 119 basis points (bps) YOY to 12.8% in F2023, while return on average assets improved to 0.6% in F2023 from 0.5% in the prior year. Morningstar DBRS expects CMT's strong earnings trend to continue in the medium term, supported by client momentum and business growth in an improving operating environment.

Risk Profile
CMT's operational and reputational risks are critical because of the immense volume of transactions processed. The operational risk inherent in this business is further elevated, as the Company 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 CMT has put in place a conservative risk management framework, which is further enhanced by oversight from both of its parent companies. CMT possesses considerable cross-organizational expertise as both BNY and CIBC have risk representatives from their organizations who participate in 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.

Funding and Liquidity
The Company's balance sheet fundamentals are healthy. CMT's funding is underpinned by broadly stable custodian deposits originated from institutions and governments. While CMT may experience some volatility in short-term deposit funding because of the nature of the custody business, this risk is mitigated by the Company's exceptional liquidity in cash and high-quality liquid securities (which accounted for about 91% of its assets in F2023).

Capitalization
CMT's capitalization is very strong and well above regulatory minimums. Supported by internal capital generation, the CET1 ratio increased by 180 bps YOY to 26.2% in F2023. The leverage ratio, the Company's most constraining capital metric, improved to 5.8% in F2023 from 4.1% in the prior year and was in excess of the required minimum of 3%.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Credit rating actions on BNY 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 are discussed separately at https://dbrs.morningstar.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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 4, 2024), https://dbrs.morningstar.com/research/433881. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024; https://dbrs.morningstar.com/research/437781) in its consideration of ESG factors.

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

The credit ratings were initiated at the request of the rated entity.

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

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

These are solicited credit ratings.

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

For more information on this credit or on this industry, visit https://dbrs.morningstar.com.

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