TEXT-Fitch affirms big 6 Canadian bank ratings after peer review

Mon Jan 28, 2013 10:50am EST

Jan 28 - Fitch Ratings has affirmed the ratings of the six largest Canadian
banks by assets (referred to as the Big Six) following a peer review committee.
The six banks included in this peer review are Bank of Montreal (BMO;
rated 'AA-/F1+'), Bank of Nova Scotia (BNS; rated 'AA-/F1+'), Canadian
Imperial Bank of Commerce (CIBC; rated 'AA-/F1+'), National Bank of
Canada (NBC; rated 'A+/F1'), Royal Bank of Canada (RBC; rated
'AA/F1+') and Toronto-Dominion Bank (TD; rated 'AA-/F1+'). The outlooks
for all six banks are Stable. A complete list of ratings is included at the end
of this rating action commentary.

RATING ACTION AND RATIONALE

The rating affirmations and Stable Outlooks reflect sound capital levels, high
asset quality, continued earnings stability, strong funding and liquidity
positions and favorable metrics relative to comparably rated international
peers. These strengths are counterbalanced by continued risk with respect to the
Canadian residential housing market, increasing consumer debt levels, global
economic headwinds, slowing loan growth, margin compression and heightened
competition.

The main domestic threat to the stability of the Canadian banks is the record
level of consumer indebtedness and the risk of overvaluation in the housing
market. Between 2001 and 2012, Canadian home prices appreciated by approximately
116% and the household debt-to-disposable income ratio increased to 166.7 from
108.3. These increases are set against a backdrop of unemployment remaining
above 7% and GDP growth hovering in the 2%-3% range.

The increased vulnerability of Canadian households to an adverse shock could
pressure Canadian banks' ratings should borrowers' ability to pay weaken due to
worsening domestic or global economic conditions. Fitch believes the immediate
impact of deterioration in the household sector would be partly mitigated by a
number of structural factors, including the high proportion of mortgages that
the banks have insured with Canada Mortgage and Housing Corporation and low
initial loan to value ratios on uninsured mortgages.

Canadian banks also benefit from sound capital levels commensurate with their
asset mix and loss experience, leaving the banks well positioned to withstand a
moderate housing stress. Continued profitability has helped them prepare for
higher capital requirements under Basel III rules effective in 2013 ahead of the
international 2019 deadline. Balance sheet liquidity and funding remain sound,
reflecting the banks' stable deposit funding bases combined with continued
affordable access to global capital markets.

SENSITIVITY/RATING DRIVERS - VRs and IDRs
Fitch does not believe there is upside rating potential for the big six banks in
the foreseeable future, given their current high ratings and on-going
uncertainty with respect to the Canadian residential mortgage market and broader
international markets. Ratings assigned to NBC, which are one to two notches
lower than those assigned to the bank's five peers, reflect its more regional
concentration in the province of Quebec.

Ratings assigned to all six banks could be adversely affected by a sharp
reversal in Canadian housing prices that weakens consumers' ability to pay while
driving rapid and disorderly consumer deleveraging. Banks with lower levels of
insured mortgage exposure (such as RBC) would likely be more exposed to the
first order effects of a housing downturn than those that have higher levels of
mortgage insurance (such as CIBC and TD). In the case of NBC, given its
geographic concentration in Quebec, its ratings would be more sensitive to a
housing downturn that was concentrated within this province.

Other potential negative rating drivers include contagion risk from U.S.,
European or Asian markets, weakened capital or liquidity positions, or material
acquisitions outside of Canada. Fitch may have a negative rating bias towards
large acquisitions that are outside of Canada and/or that increase leverage or
introduce undue integration costs. In the case of U.S. contagion, those banks
with meaningful U.S. operations (such as BMO and TD) could be more exposed to
the effects of a U.S. downturn. Banks with larger trading activities as a
percent of total revenues (such as RBC and BNS) could be exposed to negative
rating pressure in the event of outsized losses and or performance volatility
with respect to this business line, particularly if it grows to represent a
larger portion of overall revenues.

SENSITIVITY/RATING DRIVERS- Support Ratings and Support Floor Ratings

The banks' current Issuer Default Ratings (IDRs) are equalized with their
viability ratings (VRs), which remain above the support rating floor of 'A-' and
reflect the very high fundamental credit quality of the institutions. All six
banks have a support rating of '1' and a support rating floor of 'A-',
reflecting the banks' systemic importance to the Canadian economy, the
expectation that the banks will shortly be designated as domestic strategically
important banks (D-SIBs) and the credit quality and financial resources of
Canada (rated 'AAA/F1+', Outlook Stable) to provide support if necessary. At the
banks' current VRs, the long-term IDRs would not be affected by a change in
support rating floor.

SENSITIVITY/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
nonperformance and relative loss severity risk profiles. The subordinated debt
and hybrid capital ratings are primarily sensitive to any change in the VRs of
the banks (or bank subsidiaries).

SENSITIVITY/RATING DRIVERS - Subsidiary and Affiliated Company Ratings

All of the subsidiaries and affiliated companies reviewed as part of the
Canadian bank peer review factor in a high probability of support from parent
institutions to the subsidiaries. This reflects the fact that performing parent
banks have very rarely allowed subsidiaries to default. It also considers the
high level of integration, brand, management, financial and reputational
incentives to avoid subsidiary defaults.

Fitch has affirmed the following ratings:

Bank of Montreal
--Long-term IDR at 'AA-', Outlook Stable;
--VR at 'aa-';
--Short-term IDR at 'F1+';
--Senior unsecured debt at 'AA-';
--Subordinated debt at 'A+';
--Commercial paper at `F1+';
--Support Rating at '1';
--Support Floor at 'A-'.

BMO Harris Bank National Association (formerly Harris N.A.)
--Long-term IDR at 'AA-', Outlook Stable;
--VR at 'bbb+';
--Long-term deposits at 'AA';
--Short-term IDR at 'F1+';
--Short-term deposits at 'F1+';
--Support Floor at '1'.

BMO Subordinated Notes Trust
--Subordinated debt at 'A+'.

BMO Capital Trust D
BMO Capital Trust E
BMO Capital Trust II
--Preferred stock rating at 'BBB'.

Marshall & Ilsley Corporation
--Senior debt affirmed at 'AA-'.

M&I Marshall & Ilsley Bank
--Long-term deposits at 'AA';
--Senior debt at 'AA-';
--Subordinated debt at 'A+';
--Short-term deposits at 'F1+'.

M&I Bank FSB
--Long-term deposits at 'AA';
--Short-term deposits at 'F1+'.

Bank of Nova Scotia
--Long-term IDR at 'AA-', Outlook Stable;
--Short-term IDR at 'F1+';
--Long-term deposits at 'AA-';
--Senior debt at 'AA-';
--Subordinated debt at 'A+';
--Short-term debt at 'F1+';
--VR at 'aa-';
--Support Rating at '1';
--Support Rating Floor at 'A-'.

Scotiabank Capital Trust
--Trust Securities at 'BBB'.

Canadian Imperial Bank of Commerce
--Long-term IDR at 'AA-', Outlook Stable;
--Short-term IDR at 'F1+';
--VR at 'aa-'
--Short-term debt at 'F1+';
--Senior unsecured debt at 'AA-';
--Senior market-linked securities at 'AA-emr';
--Subordinated debt at 'A+';
--Preferred stock at 'BBB';
--Support Rating at '1';
--Support Rating Floor at 'A-'.

Canadian Imperial Holdings, Inc.
--Short-term debt at 'F1+'.

CIBC World Markets Plc
--Long-term IDR 'AA-', Outlook Stable;
--Short-term IDR 'F1+';
--Support Rating '1'.

CIBC Capital Trust
--Preferred stock at 'BBB'.

National Bank of Canada
--Long-term IDR at 'A+', Outlook Stable;
--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-'.

Royal Bank of Canada
--Long-term IDR at 'AA', Outlook Stable;
--VR at 'aa';
--Short-term IDR at 'F1+';
--Short-term debt at 'F1+';
--Senior unsecured debt at 'AA';
--Subordinated debt at 'AA-';
--Market-Linked Securities at 'AAemr';
--Support Rating at '1';
--Support Rating Floor at 'A-'.

RBC Capital Trust
RBC Capital Trust II
--Preferred stock at 'BBB+'.

Toronto-Dominion Bank
--Long-term IDR at 'AA-', Outlook Stable;
--Short-term IDR at 'F1+';
--Short-term debt at 'F1+';
--VR at 'aa-';
--Senior debt at 'AA-';
--Subordinated debt at 'A+';
--Preferred at 'BBB';
--Support Rating at '1';
--Support Floor at 'A-'.

TD Bank U.S. Holding Company
--Long-term IDR at 'AA-', Outlook Stable;
--Short-term IDR at 'F1+';
--Support Rating at '1'.

TD Bank, NA
--Long-term IDR at 'AA-', Outlook Stable;
--Short-term IDR at 'F1+';
--Viability Rating at 'a';
--Long-term deposits at 'AA';
--Short-term deposits at 'F1+';
--Senior debt at 'AA-';
--Support Rating at '1'.

TD Capital Trust III, IV
Northgroup Preferred Capital Corporation
--Preferred at 'BBB'.

Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);
--Rating FI Subsidiaries and Holding Companies (Aug. 10, 2012);
--'Assessing and Rating Bank Subordinated and Hybrid Securities' (Dec. 5, 2012);
--'Evaluating Corporate Governance' (Dec. 13, 2011);
--'2013 Outlook: Canadian Banks' (Nov. 14, 2012);
--'Evaluating Canadian Banks' Residential Mortgage Exposure' (May 21, 2012).

Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Rating FI Subsidiaries and Holding Companies
Assessing and Rating Bank Subordinated and Hybrid Securities
Evaluating Corporate Governance
2013 Outlook: Canadian Banks (Stable Outlook, But Household Debt Remains Key
Risk)
Evaluating Canadian Banks' Residential Mortgage Exposure
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