PrefBlog

DBRS has announced that it:

has today confirmed the ratings of Royal Bank of Canada (RBC or the Bank) and its related entities, including RBC’s Long-Term Issuer Rating at AA and Short-Term Issuer Rating at R-1 (high). RBC’s Long-Term Issuer Rating is composed of an Intrinsic Assessment (IA) of AA (low) and a Support Assessment (SA) of SA2, reflecting the expectation of timely, systemic support from the Government of Canada (rated AAA with a Stable trend by DBRS). The SA2 designation results in a one-notch uplift to the Long-Term Issuer Rating. The trends on RBC’s short-term ratings, as well as the Long-Term Issuer Rating, Long-Term Senior Debt, Long-Term Deposits and older-style subordinated debt, have been revised to Stable from Negative, while other capital instruments whose ratings are notched down from the Bank’s IA remain Stable.

The revision of the trend to Stable reflects DBRS’s view that RBC’s long-tenured track record of strong fundamentals and growing franchise points to an improving IA, which may offset the anticipated regulatory reform support-related downward pressure on the rating. Therefore, the expectation of a ratings downgrade following the removal of support is less likely.
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DBRS continues to believe that changes in Canadian banking legislation and regulation point to a declining potential for timely support for Canada’s systemically important banks. Eventually, this decline is expected to result in a change in DBRS’s SA to SA3 from SA2. Currently, for these banks, the SA2 results in an uplift of one notch above their IAs. This regime primarily affects the six big Canadian banks that have been designated as domestic systemically important banks (D-SIBs). While this bail-in regime is expected to come into force in H1 2018, the proposed new bail-inable debt will only begin to be issued by D-SIBs at that time and no existing debt will be subject to bail-in retroactively. Thus, DBRS considers that there would not be sufficient bail-inable debt initially to reduce the likelihood of systemic support from its current level in Canada. DBRS expects to maintain the current notch of support until the D-SIBs build up sufficient new bail-inable senior debt such that the likelihood of systemic support has declined to a level at which this uplift is no longer warranted. The timing of such action depends on the finalization of the bail-in regime and the extent to which the D-SIBs build up their bail-inable senior debt. Two factors pressuring the D-SIBs to issue new bail-inable senior debt are the maturing of their existing senior debt and their need to meet the newly established requirements for total loss absorbing capacity (TLAC) by November 1, 2021. DBRS continues to evaluate the impact of the proposed regulations and will comment further as the proposals are finalized. For more detail, please see “DBRS Comments on Proposed Implementation of Bail-in Regime in Canada; Bank Negative Trends Unchanged” published July 11, 2017, on dbrs.com.

The paper DBRS Comments on Proposed Implementation of Bail-in Regime in Canada; Bank Negative Trends Unchanged states in part:

Under the CDIC Act, if a bank is determined to have ceased or is about to cease to be viable, the CDIC would be authorized to take temporary control or ownership to the bank and conduct the bail-in process. Existing CDIC resolution tools include liquidation, forced sale and creation of a bridge bank. Adding to these powers, the proposed Bail-in Regime permits the conversion of bail-inable liabilities into common shares to recapitalize the distressed bank. CDIC would establish the terms and conditions of the bail-in with the intent under this Act to recapitalize the bank, while respecting the relative hierarchy of the bank’s obligations. Under this approach, more senior obligations are treated better than more junior obligations, as compared to an absolute hierarchy whereby more junior obligations would be written off completely. Thus, senior bail-inable debt would receive more common shares than NVCC securities and all securities in the same class would receive the same treatment.

In its TLAC guideline, OSFI specified its proposed minimum requirements for TLAC for D-SIBs. Initially, there will be a minimum of at least 21.5% for the Risk-based TLAC ratio (TLAC Measure / Risk Weighted Assets). Focusing on the risks faced by a bank, this ratio is considered the primary basis for assessing a D-SIB’s TLAC. There is also a minimum of 6.75% for the TLAC Leverage ratio (TLAC Measure / Exposure Measure), with the framework for determining this exposure being provided in OSFI’s Leverage Requirements guideline. This ratio is considered an overall measure of a D-SIB’s TLAC. Subject to certain adjustments and exclusions, TLAC comprises common equity Tier 1, additional Tier 1 capital, Tier 2 capital, and other TLAC instruments, principally bail-inable senior unsecured debt. OSFI considers that these minimums are consistent with the Financial Stability Board’s (FSB) requirements for G-SIBs, thereby ensuring that Canada’s six D-SIBs are in a comparable position to G-SIBs globally and prepared if there is a change in the designation of one or more of these banks. The intent of the TLAC requirements is to require D-SIBs to have enough resources to be restored to viability after experiencing significant losses in a very stressed environment. D-SIBs will be expected to maintain buffers over the minimum requirements.

The original trend change was reported on PrefBlog in 2015 in the post DBRS: Bank Senior Debt On Trend-Negative Due to Government Support Uncertainty

Preferred shares were not affected by the trend opinion, but I considered the information to be material.

RY’s currently outstanding preferreds are: RY.PR.A, RY.PR.B, RY.PR.C, RY.PR.D, RY.PR.E, RY.PR.F, RY.PR.G, RY.PR.H, RY.PR.I, RY.PR.J, RY.PR.K, RY.PR.L, RY.PR.M, RY.PR.N, RY.PR.O, RY.PR.P, RY.PR.Q, RY.PR.R, RY.PR.W and RY.PR.Z.

This entry was posted on Monday, July 31st, 2017 at 8:25 pm 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.