DBRS has announced that it:
upgraded the ratings of National Bank of Canada (National or the Bank) and its related entities, including the Bank’s Long-Term Issuer Rating to AA from AA (low) and Short-Term Issuer Rating to R-1 (high) from R-1 (middle). Additionally, DBRS Morningstar changed the trends on all ratings to Stable from Positive. National’s Long-Term Issuer Rating is composed of an Intrinsic Assessment of AA (low) and a Support Assessment of SA2, which reflects the expectation of timely systemic support from the Government of Canada (rated AAA with a Stable trend by DBRS Morningstar). As a result of the SA2 designation, the Bank’s Long-Term Issuer Rating benefits from a one-notch uplift.
KEY RATING CONSIDERATIONS
The upgrades and Stable trends recognize National’s successful expansion of its footprint in targeted markets and niches across Canada, especially in Wealth Management (WM) and Financial Markets (FM). In addition, the Bank’s strong performance over the last few years, with Personal and Commercial (P&C) and WM now contributing a larger portion of earnings, has placed National at the top of its peer range in terms of profitability metrics.The ratings also reflect National’s dominance in its home province, the Province of Québec (Québec; rated AA (low) with a Stable trend by DBRS Morningstar), which had experienced strong economic growth prior to the Coronavirus Disease (COVID-19) pandemic and is now showing a healthy rebound. Furthermore, the Bank benefits from strong preprovision earnings, while the transformation efforts in its P&C business and growth of its WM business have driven growth in client deposits. The ratings also consider the small yet growing contribution of the U.S. Specialty Finance and International (USSF&I) segment, which DBRS Morningstar views as having a higher risk profile, as well as potentially more volatile earnings. Lastly, DBRS Morningstar notes that National’s FM business segment is an important contributor to the Bank’s franchise and has benefitted from the market volatility experienced in the last couple of years. Although the majority of transactions are client driven, the segment’s activities could expose the Bank to increased capital markets risk from significant market downturns.
The ratings also consider that government support measures have largely mitigated the negative economic impacts of the pandemic. Positively, economic performance has rebounded, and the labour market is essentially at full capacity; however, headwinds persist from a potentially aggressive interest rate tightening cycle to combat inflation, geopolitical tensions related to the Russia-Ukraine conflict, supply-chain disruptions, and the pandemic. Furthermore, DBRS Morningstar remains concerned about the combination of high Canadian household debt levels that have reached an all-time high and elevated home prices that have been driven by housing market imbalances and robust demand during the pandemic (particularly in the greater Toronto and Vancouver areas). Housing prices remain vulnerable and, as a result, National and its Canadian peers remain susceptible to adverse changes in the Canadian real estate market. Positively, DBRS Morningstar views National’s residential mortgage loan portfolio as conservatively underwritten, reflecting the Bank’s strong risk culture.
Affected issues are NA.PR.C, NA.PR.E, NA.PR.G, NA.PR.S and NA.PR.W.
Hi, I would like to ask a couple of questions, hope that’s okay !
1) what is the difference between Government of Canada bonds and the Housing Trusts ? I see higher yields from the housing trusts ? is there any additional risk for the average person ?
2) it seems perhaps some readers are concerned about higher rates and higher yields. I wonder if anyone has a suggestion (apart from the concept of keeping some funds in cash) or strategy for this ? Certainly yields could end up higher, but then, those short term funds are sitting in cashable stuff that pays lower…while waiting for higher payouts that may or may not come about
thanks !!
1) CMHC says:
So the credit quality of CMCH Mortgage Bonds is equal to that of Government of Canada direct issues.
The difference in yield is due to liquidity, which is extremely important in credit markets – and of practically overwhelming importance in the Canadian preferred share market – and so has been discussed on PrefBlog quite often. Start HERE and HERE.
You will often be told, for instance, that the yield difference between corporate bonds and government bonds is due to credit risk, since corporations can default and (most) governments (probably) won’t. This is part of the reason, but often just a small part and certainly not the full story. When you buy a government bond, one of your motivations might be that you need the ability to transact $50-million in one ‘phone call without moving the market. Another might be that regulations force you buy these things, perhaps because you are a bank.
Neither of these considerations are important to most people, but they are important to enough participants to have an effect on the market. So the major determinant of the yield spread between CMHC bonds and GOCs is their liquidity.
Here’s a list of currently outstanding GOC issues. There are many, many issues with more than $25-billion par value outstanding. Here’s a list of currently outstanding CMHC issues. There is a handful of issues with more than $10-billion outstanding, but the average is more like $5-billion.
It’s much easier to do a $50-million trade in one ‘phone call without moving the market if you are transacting in GOC bonds rather than CMHC ones. And when you buy GOC bonds, you are paying for that liquidity (via a lower yield), whether you need it or not.
2) I deplore the fashionability of concern about higher rates. Higher rates are always a possibility and this possibility should always be accounted for in portfolio construction. Choose a portfolio that will (probably) meet your (realistic) investment goals regardless of external gyrations and eschew market timing. You will sleep better and (probably) do better.