Morningstar DBRS Confirms National Bank of Canada's Long-Term Issuer Rating at AA, Stable Trend

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on National Bank of Canada (National or the Bank) and its related entities, including the Bank's Long-Term Issuer Rating at AA and Short-Term Issuer Rating at R-1 (high). The trends on all credit ratings are Stable. National's Long-Term Issuer Rating is composed of an Intrinsic Assessment of AA (low) and a Support Assessment of SA2, which reflects the expectation of timely systemic support from the Government of Canada (rated AAA with a Stable trend by Morningstar DBRS). As a result of the SA2 designation, the Bank's Long-Term Issuer Rating benefits from a one-notch uplift.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations and Stable trends recognize National's pan-Canadian universal banking model with footprints in targeted markets and niches across the country. In particular, the February 2025 acquisition of Canadian Western Bank (CWB) made strategic sense and diversified National's revenue, both by product and geographically, especially in Western Canada. The credit ratings also reflect National's dominance in its home province, the Province of Québec (Québec; rated AA (low) with a Stable trend). The Bank benefits from strong pre-provision earnings, with significant non-interest revenue growth in its Financial Market (FM) and Wealth Management (WM) business segments, placing the Bank at the top of its peer range in terms of profitability metrics. Additionally, the Bank maintains a strong balance sheet with metrics at the top of its peer range, including growing its core deposits to reduce reliance on wholesale funding and maintaining strong liquidity and capital positions.

The credit ratings also consider the growing contribution of the U.S. Specialty Finance and International (USSF&I) segment, which Morningstar DBRS views as having a higher risk profile, as well as potentially more volatile performance. Additionally, Morningstar DBRS is cautious of the integration of CWB and the associated operational risk given the Bank's limited track record of integrating significant acquisitions. This risk is somewhat mitigated by CWB's relatively less complex business model. Moreover, Morningstar DBRS is concerned about heightened economic and geopolitical uncertainty, particularly as it relates to U.S. trade policy, which could have an impact on the Bank's profitability and asset quality.

CREDIT RATING DRIVERS
Over the longer term, Morningstar DBRS would upgrade the credit ratings if the Bank were to significantly build the depth, scale, and diversity of its franchise while maintaining a similar risk appetite.

Conversely, Morningstar DBRS would downgrade the credit ratings if there were a sustained deterioration in earnings or asset quality. Additionally, National's credit ratings would be downgraded if there are significant operational issues with the CWB acquisition integration.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Strong
National operates a pan-Canadian franchise with a dominant position its home province of Québec, where its Personal and Commercial (P&C) banking businesses maintain leading market shares. With the acquisition of CWB, which completed on February 3, 2025, the Bank expanded its product offerings and footprint across the country especially in Western Canada, including Alberta and British Columbia. In addition, the Bank has a few international investments with strong growth, including 100% ownership of Credigy, a specialty finance company based in the U.S. (Georgia), and ABA Bank, the largest commercial bank in Cambodia, by total assets. In F2024, USSF&I accounted for 12% of the bank's total revenue and 15% of net income, excluding the Other segment.

Earnings Combined BB Assessment: Strong/Good
With its focused franchise and leading position in Québec, National generates strong underlying earnings, including a healthy proportion of stable fee income, which contributes to the Bank's ability to absorb credit losses. In F2024, the Bank continued to record profitability metrics that are at the top of the peer range. Its F2024 reported earnings reached $3.8 billion, up 16% compared with the prior year driven by the growth from all business segments. Revenue growth was recorded at 13% year-over-year (YOY), balanced by higher reported non-interest expenses (up 5% YOY) and provisions for credit losses (PCLs) (up 43% YOY). According to Morningstar DBRS' calculation, its return on average assets stood at 0.9% and a return on average common equity at 16% in F2024, alongside an efficiency ratio of 52.8%. Furthermore, in Morningstar DBRS' view, the acquisition of CWB presents cross-selling and revenue synergy opportunities for all business segments.

Risk Combined BB Assessment: Strong
In Morningstar DBRS' view, prudent risk management and a conservative lending culture enable National to maintain solid asset-quality metrics, despite some normalization. The Bank reported a YOY increase in PCLs, which reached $254 million in Q1 2025, compared with $120 million as of Q1 2024, reflecting a less favourable macroeconomic outlook and continued normalization of credit performance. The gross impaired loans ratio increased YOY to 0.84% in F2024, primarily from USSF&I, FM and commercial portfolios, but remains at a manageable level. Furthermore, although credit in the USSF&I segment is in riskier sectors or geographies, Morningstar DBRS notes that USSF&I loans form around 9% of the Bank's total portfolio and that this credit risk has been historically well-managed, leveraging the expertise and knowledge the Bank has in the local markets.

Funding and Liquidity Combined BB Assessment: Strong
The Bank has a strong funding profile with a growing retail and commercial deposit base. This includes an increase in the client's share of wallet through various coordinated initiatives among the Bank's P&C, WM, and FM segments. As a result, according to Morningstar DBRS' calculation, retail and commercial deposits make up 55% of total funding, the highest among large Canadian peers. Additionally, National has ready access to a wide range of wholesale funding sources with a diverse international investor base. Meanwhile, the Bank enjoys the highest liquidity level among peers at 154% as measured by the liquidity coverage ratio and a net stable funding ratio of 123% for Q1 2025, both of which are well above the regulatory minimums and consistently higher than those of its large bank peers.

Capitalization Combined BB Assessment: Strong
Capitalization is strong as National continues to organically generate sufficient capital to support balance sheet growth. As at January 31, 2025, National's Common Equity Tier 1 (CET1) ratio stood at 13.57%, at the top of its peer range. The CWB acquisition is expected to reduce its CET1 ratio by around 15 basis points and at this level, the ratio is still well above the regulatory minimum of 11.5% for Domestic Systemically Important Banks. In Q1 2025, National's risk-based total loss-absorbing capacity ratio was at 31.2% and a leverage ratio of 4.3%, over the regulatory threshold of 25% and 3.5% and above Canadian bank peer averages.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/452614.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
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) 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://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 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 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.

These are solicited credit ratings.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website https://dbrs.morningstar.com/understanding-ratings

These credit ratings are 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 issuer took place on June 12, 2024, when Morningstar DBRS confirmed the credit ratings of the Bank and its related entities.

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 monitored.

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: Jiani Wu, CFA, Vice President, North American Financial Institution Ratings
Rating Committee Chair: Tim O'Brien, CFA, CAIA, Managing Director, North American Financial Institution Ratings
Initial Rating Date: March 31, 1981

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

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