Morningstar DBRS Assigns AAA Credit Rating to NBC Legislative Global Covered Bonds, Series CBL23

DBRS Limited (Morningstar DBRS) assigned a credit rating of AAA to the Covered Bonds, Series CBL23 (Series CBL23) issued under the National Bank of Canada (NBC) Legislative Global Covered Bond Programme (the Programme). Series CBL23 (EUR 750 million) has a coupon rate of 2.75% and a maturity date of October 18, 2028. All covered bonds issued under the Programme (the Covered Bonds) rank pari passu with each other and are currently rated AAA by Morningstar DBRS.

The AAA credit ratings are based on the following analytical considerations:

-- A Covered Bond Attachment Point of AA, which is the Morningstar DBRS Long-Term Senior Debt rating of NBC. NBC is the Reference Entity for the Programme.
-- A Legal and Structuring Framework (LSF) assessment of Strong is associated with the Programme.
-- A Cover Pool Credit Assessment of A (high).
-- An LSF-Implied Likelihood (LSF-L) of AAA.
-- While not currently applicable, based on the recovery notching scale, up to two notches' uplift from the LSF-L for high recovery prospects is possible.
-- A level of overcollateralization (OC) of 9.1% (based on the Asset Percentage of 91.7% as at September 27, 2024 to which Morningstar DBRS gives credit.

Morningstar DBRS considered the following factors in its analysis described above:

(1) The Covered Bonds are senior unsecured direct-deposit obligations of NBC and are excluded from Canada's bank recapitalization regime.

(2) In addition to a general recourse to NBC's assets, the Covered Bonds are supported by a diversified pool of first-lien conventional Canadian residential mortgages with a maximum loan-to-value (LTV) of 80.0% at origination (the Cover Pool). The Cover Pool was approximately $22.3 billion as of September 27, 2024. The mortgages may have amortizing and nonamortizing revolving loan parts secured by the same first lien. Only the amortizing loan parts are in the Cover Pool.

(3) The Covered Bonds benefit from several structural features, such as a reserve fund (when applicable) and rating thresholds for the swap counterparties, servicer, account bank, cash manager, and GIC provider.

(4) Upon a default by NBC, the final maturity date on the Covered Bonds can be extended for 12 months, which increases the likelihood that the Covered Bonds can be fully repaid.

(5) There is a specific covered bond legislative framework in Canada. In addition, the contractual obligations of the transaction parties are supported by Canada's well-developed commercial and bankruptcy laws, the satisfactory opinions provided by legal counsel to NBC, and a generally creditor-friendly legal environment in Canada.

Despite these strengths, the credit ratings on the Covered Bonds could face the following challenges:

(1) The Cover Pool has a large concentration in the Province of Québec, exposing the Cover Pool to high geographic and regional economic risks. A weakened housing market in Canada, especially in Québec, could result in higher defaults and/or lower recoveries than the assumptions used in the Cover Pool Credit Assessment. This risk is significantly reduced by the home equity available in relation to the portfolio weighted-average LTV of 48.2% (based on indexed property value) reported by NBC as of September 27, 2024.

(2) NBC may need to add mortgages to maintain the Cover Pool, incurring substitution and potential credit deterioration risks. These risks are mitigated by the ongoing monitoring of the Cover Pool to ensure that the OC available is commensurate with the credit ratings of the Covered Bonds. Based on the latest review of the Cover Pool, Morningstar DBRS considers 3.0% OC, corresponding to the Regulatory OC Minimum, commensurate with the AAA credit ratings.

(3) There is an inherent liquidity gap between the scheduled repayments of the Covered Bonds and the repayment of underlying mortgage loans over time. This risk is mitigated by the OC, the buildup of a reserve fund if NBC is not rated at least A (low) or R-1 (low), and the 12-month maturity extension upon default by NBC.

Morningstar DBRS' "Legal and Derivatives Criteria for Canadian Structured Finance" expects regular swap payments to rank no higher in priority than interest payments on the Covered Bonds. Should interest rate swap payments (excluding termination payments) rank higher in priority than interest payments on the Covered Bonds, Morningstar DBRS will assess the impact at that time and take the appropriate credit rating action.

NBC is Canada's sixth-largest bank as measured by assets, with $453.9 billion in assets and $22.0 billion in common equity as of July 31, 2024. NBC is the servicer of the mortgages in the Cover Pool.

Morningstar DBRS' credit ratings on the Covered Bonds addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for the Covered Bonds are the related Interest Amounts and the related Principal Amounts.

Morningstar DBRS's credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations.

Morningstar DBRS's long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS   
There were no Environmental, Social, or 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 at https://dbrs.morningstar.com/research/437781 (August 13, 2024).

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

The principal methodology applicable to the credit rating is Global Methodology for Rating and Monitoring Covered Bonds at https://dbrs.morningstar.com/research/430636 (April 2, 2024).

Other methodologies referenced in this transaction are listed at the end of this press release.

The Morningstar DBRS Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. Morningstar DBRS analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://dbrs.morningstar.com/research/439965.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.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.

Morningstar DBRS 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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

More details on the Cover Pool and the Programme are provided in the Monthly Canadian Covered Bond Report, which is available by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed credit ratings:

The last credit rating action on this Programme took place on March 28, 2024, when Morningstar DBRS confirmed the credit ratings of the outstanding series issued under the Programme.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Tona Tang, Vice President, Canadian Structured Finance
Rating Committee Chair: Tim O'Neil, Managing Director, Head of Canadian Structured Finance
Initial Rating Date: December 9, 2013

DBRS Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

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

Legal and Derivatives Criteria for Canadian Structured Finance (August 12, 2024; https://dbrs.morningstar.com/research/437761)

Operational Risk Assessments for Canadian Structured Finance (August 6, 2024; https://dbrs.morningstar.com/research/437547)

Predictive model: DBRS Canadian RMBS Model (Version 5.0.1.1; https://dbrs.morningstar.com/models)

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/410863.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.