DBRS Takes Rating Actions on Six Canadian Banking Groups after Finalization of Bail-In Regime

DBRS Limited and DBRS, Inc. (collectively, DBRS) changed the trend to Stable from Negative on the Long-Term Issuer Ratings, Senior Debt Ratings and Deposits ratings of the Bank of Montreal, The Bank of Nova Scotia, the Canadian Imperial Bank of Commerce and the National Bank of Canada. These actions result from the publication by the Minister of Finance of the final rules related to the Bank Recapitalization Regime (the Bail-in Regime). DBRS notes that the Stable trends on the long-term ratings of The Toronto-Dominion Bank and Royal Bank of Canada were unaffected. For these domestic systemically important banks (D-SIBs) to which the Bail-in Regime is applicable, DBRS has created a new obligation named Bail-inable Senior Debt. This new obligation rating reflects the senior debt that these banks will begin issuing once the Bail-in Regime goes into effect on September 23, 2018. Lastly, DBRS has downgraded the legacy Subordinated Debt ratings of these D-SIBs by one notch.

KEY RATING CONSIDERATIONS
The revision of the trend to Stable from Negative for the affected long-term ratings reflects DBRS’s view that a downgrade of existing senior debt for the D-SIBs is now unlikely. It is anticipated that systemic support would still be sufficient to add a notch for such support until the D-SIBs issue adequate amounts of Bail-inable Senior Debt to meet their total loss-absorbing capacity (TLAC) requirements. Once an adequate level of bail-inable debt has been issued, the likelihood of future systemic support would be much lower. Accordingly, the notch of support would then be withdrawn. However, the new Bail-inable Senior Debt creates an additional buffer that better protects all senior obligations that cannot be bailed in under the regulation. Therefore, DBRS does not expect to downgrade any long-term ratings of existing senior obligations of the D-SIBs.

When issued, DBRS will rate the new Bail-inable Senior Debt at the level of each bank’s Intrinsic Assessment (IA), reflecting the risk of a D-SIB being put into resolution.

The downgrades of the legacy Subordinated Debt ratings reflect the structural subordination to the Bail-inable Senior Debt.
 
RATING DRIVERS
Once sufficient Bail-inable Senior Debt has been issued by the D-SIBs, DBRS anticipates removing the uplift from systemic support, which would result in negative pressure on the ratings. However, DBRS expects that as the D-SIBs issue sufficient Bail-inable Senior Debt to meet their TLAC requirements, the other senior obligations and deposits of the D-SIBs are better protected by this additional layer of Bail-inable Senior Debt in the capital hierarchy. As a result, DBRS expects to maintain the ratings of the D-SIBs at their current levels once systemic support is removed.

RATING RATIONALE
Under the Bail-in Regime, Bail-inable Senior Debt will have preferential treatment during a bail-in compared with all other securities of a non-viable bank that rank below such debt in the capital structure. Specifically, all capital instruments would be bailed in and converted fully into common equity before Bail-inable Senior Debt is converted. DBRS will rate the new Bail-inable Senior Debt at the level of each D-SIB’s IA, reflecting the risk of a D-SIB being put into resolution. This rating would be one notch below DBRS’s ratings of the other senior obligations and deposits of the D-SIBs that currently benefit from systemic support. Going forward, these instruments will eventually benefit from the additional layer of Bail-inable Senior Debt in the securities hierarchy. DBRS expects that the D-SIBs will begin to issue their Bail-inable Senior Debt by the end of calendar-year 2018.

The new Bail-in Regime in Canada reduces the likelihood of systemic support but bolsters the position of senior unsecured obligations by creating a new type of senior bank debt that is bail-inable. The likelihood of systemic support does not go away immediately. Instead, DBRS expects that the likelihood of such support will decline as the banks build up their required new bail-inable debt.

DBRS notes that, while the Bail-in Regime does not specifically prohibit the government from bailing out a failing bank, our banking methodology requires that systemic support be sufficiently predictable in timeliness and scale to improve the ratings. In DBRS’s view, the Bail-in Regime reduces the timeliness and scale of potential support. As a result, DBRS expects to change the Support Assessment (SA) designations of the D-SIBs to SA3 from SA2 once a larger TLAC buffer is achieved. Currently, the SA2 designations provide an uplift of one notch to the D-SIBs’ long-term ratings.

Additionally, given existing Canadian Deposit Insurance Corporation powers, any legacy capital instruments that are not Non-Viability Contingent Capital (NVCC) would be subject to losses prior to imposing losses on Bail-inable Senior Debt. To reflect the greater likelihood of these non-NVCC legacy capital instruments incurring losses in a recapitalization process and to preserve an appropriate debt hierarchy, DBRS has downgraded the ratings of the Subordinated Debt of the D-SIBs by one notch. DBRS has also maintained the ratings on NVCC instruments as they are deemed to be well placed at their current levels.

 
Notes:
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.dbrs.com.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017), which can be found on dbrs.com under Methodologies.

The primary sources of information used for these ratings include regulation from the Government of Canada and company documents. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Bank of Montreal and related entities:

Lead Analyst: Robert Colangelo, Senior Vice President, Canadian Banking Financial Institutions - Global Financial Institutions Group
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings
Initial Rating Date: December 31, 1980

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

Bank of Nova Scotia, The and related entities:

Lead Analyst: Robert Colangelo, Senior Vice President, Canadian Banking Financial Institutions - Global Financial Institutions Group
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings
Initial Rating Date: December 31, 1980

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

Canadian Imperial Bank of Commerce and related entities:

Lead Analyst: Robert Colangelo, Senior Vice President, Canadian Banking Financial Institutions - Global Financial Institutions Group
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings
Initial Rating Date: December 31, 1980

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

National Bank of Canada and related entities:

Lead Analyst: Maria-Gabriella Khoury, Vice President - Global Financial Institutions Group
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings
Initial Rating Date: March 31, 1981

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

Royal Bank of Canada and related entities:

Lead Analyst: John Mackerey, Vice President - Global Financial Institutions Group
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG
Initial Rating Date: November 30, 1980
Most Recent Rating Update: July 31, 2017

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

Toronto-Dominion Bank, The and related entities:

Lead Analyst: John Mackerey, Vice President - Global Financial Institutions Group
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings
Initial Rating Date: November 30, 1980
Most Recent Rating Update: July 31, 2017

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.