PrefBlog

Standard & Poor’s has announced:

• •On Sept. 18, 2014, we published our global criteria for rating bank hybrid capital instruments (see “Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And Assumptions”).
• •Following the criteria publication, we are lowering our issue credit ratings on 68 Canadian bank hybrid capital instruments and removing the “Under Criteria Observation” designation from the ratings.
• •We believe that banking regulators are adopting a tougher “bail-in” stance (where investors share in the cost of a government’s rescue of a failing bank) toward hybrid capital instruments compared with our expectations in late 2011.
• •This increases the possibility that banks might have to use hybrid capital instruments to a greater extent to absorb losses, and that regulators would be prepared to see such instruments absorb losses as a response to a bank stress.

Standard & Poor’s Ratings Services today said it lowered its issue credit ratings on 68 bank hybrid capital instruments issued by Canadian banks, and affirmed the ratings on 60 instruments. In addition, we removed the “Under Criteria Observation” (UCO) designation from the ratings, which we had labeled as UCO following the release of our new bank hybrid criteria on Sept. 18 (for more information, see “Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And Assumptions” published Sept. 18, 2014, on RatingsDirect).

We have lowered the ratings one notch on Tier 1 preferred shares issued by Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Laurentian Bank of Canada, National Bank of Canada, Royal Bank of Canada, and The Toronto-Dominion Bank. We have affirmed the ratings on subordinated debt issues of the same issuers that had been placed under criteria observation. We have lowered the ratings on HSBC Bank Canada’s preferred shares and subordinated debt by two and one notches, respectively, based on our group rating methodology and the parent-level ratings on HSBC.

The downgrades reflect our view that regulators in Canada and elsewhere are adopting a tougher “bail-in” stance (where investors share in the cost of a government’s rescue of a failing bank) toward hybrid capital instruments compared with our expectations in late 2011. This increases the possibility that banks might have to use hybrid capital instruments to a greater extent to absorb losses, for example, through coupon nonpayment or conversion to common equity. We believe new regulations position regulators to stop banks from making their payments to hybrid capital investors at what we consider to be earlier-than-before points in the deterioration of a bank’s financial strength. (For details, see “Increasing Bail-In Risks For Bank Hybrid Capital Instruments Are Behind Our Proposed Criteria Change,” published Feb. 6, 2014.
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In our view, the risks for hybrid capital instruments are higher in jurisdictions such as Canada that are adopting the Basel III framework. The updated criteria provide a consistent basis for applying notches to reflect heightened risks of coupon nonpayment due to the Basel III capital conservation buffer mechanism, and to reflect the risk associated with a contractual or statutory conversion or write-down mechanism. The changes to Tier 1 hybrid instrument ratings in Canada reflect the application of an additional notch for coupon nonpayment risk arising from implementation of the Basel III framework.
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COMPANIES WITH AFFECTED OUTSTANDING ISSUES (PARENTS ONLY LISTED)
Bank of Montreal
The Bank of Nova Scotia
Caisse centrale Desjardins
Central 1 Credit Union
Canadian Imperial Bank of Commerce
HSBC Bank Canada
Laurentian Bank of Canada
National Bank of Canada
Royal Bank of Canada
Toronto-Dominion Bank (The)

Affected issues are:

All this follows the S&P announcement discussed on PrefBlog in the post S&P Sets Outlook-Negative on Canadian Banks.

The “tougher ‘bail-in’ stance” referred to in the S&P release was discussed on PrefBlog in the post Feds Consulting on Bank Recapitalization Regime.

This entry was posted on Thursday, October 2nd, 2014 at 12:41 am and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.