Fitch Ratings has today affirmed National Bank of Canada's (NBC) ratings at 'A+/F1'. The Rating Outlook remains Stable. A full list of rating actions is at the end of this press release.
The rating affirmation reflects NBC's strong asset quality, ample liquidity and consistent profitability. It follows a periodic review of Fitch's Canadian Banks.
KEY RATING DRIVERS - VRS, IDRS, AND SENIOR DEBT
National Bank of Canada's (NBC) ratings reflect the company's strong asset quality and stable operating performance. NBC's ratings are further supported by its ample liquidity profile and favorable market share in its primary market of Quebec. They are constrained by lower regulatory capital levels and limited company profile relative to higher rated Canadian bank peers. As the smallest of the 'Big Six' Canadian, NBC lacks the scale and geographic diversity benefiting larger Canadian competitors.
Since last review, NBC posted record income for FY 2014, driven primarily by continued growth in earning assets and wealth management. The wealth management segment in particular reported a significant increase in income from both organic growth and earnings realized from its acquisition of TD Waterhouse Institutional Services, which contributed approximately 30% of the increase. Fitch views NBC's continued success in the wealth management positively as it underscores management's successful execution of a disciplined strategy to expand its wealth management platform across Canada.
NBC's asset quality continues to outperform Canadian banking peers with impaired loans representing 0.55% of total loans compared to the peer average of 0.65% as of FY 2014. Like Canadian bank peers, NBC's asset quality performance has benefited from the continued strength of Canada's economy. However, historically low interest rates, attractive housing affordability measures and a solid labor market have been key drivers of record high housing prices and consumer indebtedness. Given cyclical lows on impaired loans and credit losses and historically high consumer indebtedness, Fitch expects some level of asset quality deterioration as economic growth slows and credit conditions normalize.
NBC's ratings are also supported by the bank's strong market position, deposit market share and brand recognition in its primary market of Quebec. Fitch generally views the Quebec economy as less volatile given its slightly weaker historic growth and lower household indebtedness relative to the broader Canadian economy. While NBC's franchise in Quebec presents some competitive advantages in its core market, NBC is particularly sensitive to any idiosyncratic stress in Quebec's economy due to its relative lack of geographic diversity.
NBC's ratings continue to be constrained by lower capital levels and weaker profitability than Canadian banking peers. While Fitch views NBC's capital as a sufficient cushion in an adverse economic scenario, NBC is more vulnerable in severe stress tests than higher rated peers given its lower capital base. Furthermore, NBC's earnings continue to be pressured by lower yielding earning assets and a higher cost of funds. While NBC has been effective in improving non-interest revenues and managing expenses, a growing portion of NBC's revenues are derived from the financial markets segment, which Fitch views as a more volatile sector.
RATING SENSITIVITIES - IDRS, NATIONAL RATINGS AND SENIOR DEBT
NBC's ratings are solidly situated at their current level. However, significant growth into new markets outside Canada or outsized growth in new, higher risk segments could potentially pressure the ratings.
NBC's ratings are highly sensitive to the company's stable earnings and credit quality. Thus outsized losses and or performance volatility with respect to NBC's financial markets business would be viewed negatively, particularly if the business grows to represent a significant portion of NBC's revenues. Moreover, a housing shock concentrated in the province of Quebec that results in adverse loan performance and capital impairment may also result in a negative credit action.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
The affirmation of NBC's SRs and SRFs reflect the extremely high probability of support from the Canadian government ('AAA', Rating Outlook Stable) if required. Canada has an extremely high ability to support its banks especially given its financial flexibility, though its propensity to do so is becoming less certain.
In Fitch's view, there is a clear intention to reduce support for D-SIFI's in Canada, as demonstrated by commentary and actions from Canadian banking regulators seeking to protect tax payers from the risk of a large financial institution failing. This is further supported by the proposed issuance of non-viable contingent capital (NVCC) instruments, resolution powers given regulatory authorities under the CDIC Act, and other initiatives that demonstrate the Canadian government's progress to reduce the propensity of state support for banks going forward. Fitch believes this increases the likelihood of NVCC and potential senior debt losses if one or more of the Canadian banks run afoul of solvency assessments.
RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
Fitch is classifying Canada as a Path 2 country as defined in its September 2013 report 'Bank Support: Likely Rating Paths', and given the factors noted above, Fitch expects there to be some level of support for NBC going forward, and as such does not expect the SR to be impacted.
The SRF ratings are more likely to be impacted and are sensitive to progress made in completing NVCC issuances and any additional regulatory initiatives that may be imposed on the Canadian D-SIFIs. Fitch's assessment of continuing support for Canadian D-SIFI's has to some extent relied upon resolution powers granted regulators under the CDIC ACT as well as the potential size, structure, and feasibility of NVCC implementation.
Fitch expects that the continued regulatory action to ensure sufficient contingent capital will be implemented for all Canadian banks in the near term, but regardless of its finalization, Fitch believes that sufficient regulatory progress continues to be made over the ratings time horizon. Therefore, Fitch expects to revise NBC's SRFs to 'BBB-' at some point over the next 12 months.
Absent a material in change economic conditions or the company's stand-alone credit profiles, a revision of the SRF to 'BBB-' would mean no change to NBC's Long-term IDR and debt ratings because its viability ratings are all above the SRF.
KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital issued by the banks and by various issuing vehicles are all notched down from the banks' (or bank subsidiaries') VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles. Fitch attributes a five notch differential on the preferred securities from the VR given management and regulatory authorities' powers to suspend dividends.
RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The subordinated debt and hybrid capital ratings are primarily sensitive to any change in the VRs of the banks (or bank subsidiaries).
Fitch has affirmed the following ratings with a Stable Outlook:
National Bank of Canada
--Long-term IDR at 'A+';
--Short-term IDR at 'F1';
--VR at 'a+';
--Senior debt at 'A+';
--Subordinated debt at 'A';
--Preferred stock at 'BBB-';
--Short-term deposits at 'F1';
--Support Rating at '1';
--Support Rating Floor at 'A-'.
National Bank of Canada New York Branch
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.
NBC Asset Trust
--Preferred Stock at 'BBB-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (January 2014);
Assessing and Rating Bank Subordinated and Hybrid Securities Criteria (January 2014);
--'The Evolving Dynamics of Support for Banks' (September 2013);
--'Bank Support: Likely Rating Paths' (September 2013);
--2015 Outlook: Canadian Banks (December 2014).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397
The Evolving Dynamics of Support for Banks
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715000
Bank Support: Likely Rating Paths
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715001
2015 Outlook: Canadian Banks (Stable RatingOutlook, Negative Sector OutlookRemains for 2015)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=810389
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978299
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