Fitch Affirms Canadian Covered Bond Programs at 'AAA'

Tools

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed Bank of Montreal's (BMO; 'AA-'/'F1+', Outlook Stable), Bank of Nova Scotia's (BNS; 'AA-'/'F1+', Outlook Stable), Canadian Imperial Bank of Commerce's (CIBC; 'AA-'/'F1+', Outlook Stable), National Bank of Canada's (NBC; 'A+'/'F1', Outlook Stable) and Royal Bank of Canada's (RBC; 'AA'/'F1+', Outlook Stable) covered bonds at 'AAA'. The rating actions follow the implementation of the agency's updated Covered Bond Counterparty Criteria (see 'Covered Bonds Counterparty Criteria', dated March 14, 2011 at www.fitchratings.com).

Following the counterparty criteria implementation, the Discontinuity Factors (D-Factors) of the programs have been increased as follows:

--BMO: to 19.7% from 18.1%,

--BNS: to 22.2% from 18.1%,

--CIBC: to 24.9% from 21.2%,

--NBC: to 24.9% from 21.2%,

--RBC: to 23.4% from 18.1%.

The increase of the D-Factors has no impact on the ratings of the covered bonds.

The assessment of each of the D-Factors incorporates the agency's expectation that certain liquidity risk mitigants will be introduced to cover at a minimum the amount of expected covered bond interest payments and senior expenses due over the next three months on a rolling basis, subject to the issuer being rated below 'A'/'F1'. Each of the issuers has already included or confirmed that such mitigants will be included in the respective program documentation by Oct. 31, 2011 at the latest.

It further incorporates Fitch's view that internal derivative counterparties, even if subject to adequate replacement provisions, leave covered bond investors more vulnerable to an issuer default compared to programs with external derivative counterparties. Therefore, the agency has tightened the relationship between the issuer rating and the covered bond rating.

BMO's D-Factor of 19.7%, combined with the bank's long-term IDR of 'AA-', enables the rating on a probability of default (PD) basis to remain unchanged at a maximum of 'AAA' for the covered bonds provided the level of OC allows the cover pool to withstand 'AAA' stress levels and repay maturing covered bonds when due. The asset percentage (AP) supporting Fitch's 'AAA' rating on the covered bonds is 95.0% which equals the program's current contractual (AP). All else equal, the covered bonds rating could be maintained at 'AAA' as long as the issuer's IDR is rated at least 'BBB+'.

BNS's D-Factor of 22.2%, combined with the bank's enables provides for the rating on a probability of default (PD) basis to remain unchanged at a maximum of 'AAA' for the covered bonds provided the level of overcollateralization (OC) allows the cover pool to withstand 'AAA' stress levels and repay maturing covered bonds when due. The asset percentage (AP) supporting Fitch's 'AAA' rating on the covered bonds is 95% which equals the program's current contractual AP. All else equal, the covered bonds rating could be maintained at 'AAA' as long as the issuer's IDR is rated at least 'BBB+'.

CIBC's D-Factor of 24.9%, combined with the bank's long-term IDR of 'AA-', limits the rating on a PD basis to a maximum of 'AA+' for the covered bonds provided the level of OC allows the cover pool to withstand 'AA+' stress levels and repay maturing covered bonds when due. A one-notch uplift to 'AAA' is achievable when taking recoveries given default into account, provided the level of OC also allows stressed recoveries on covered bonds assumed to be in default to exceed 51% in a 'AAA' scenario. CIBC's previous D-Factor enabled the covered bonds to reach 'AAA' on a PD rather than recovery basis. The AP supporting Fitch's 'AAA' rating on the covered bonds is 95% which equals the program's current contractual AP. All else equal, the covered bonds rating could be maintained at 'AAA' as long as the issuer's IDR is rated at least 'A-', compared to 'BBB+' previously.

NBC's D-Factor of 24.9%, combined with the bank's long-term IDR of 'A+', limits the rating on a PD basis to a maximum of 'AA+' for the covered bonds provided the level of OC allows the cover pool to withstand 'AA+' stress levels and repay maturing covered bonds when due. A one-notch uplift to 'AAA' is achievable when taking recoveries given default into account, provided the level of OC also allows stressed recoveries on covered bonds assumed to be in default to exceed 51% in a 'AAA' scenario. The AP supporting Fitch's 'AAA' rating on the covered bonds is 93.5% which equals the program's current contractual AP. All else equal, the covered bonds rating could be maintained at 'AAA' as long as the issuer's IDR is rated at least 'A-', compared to 'BBB+' previously.

RBC's D-Factor of 23.4%, combined with the bank's long-term IDR of 'AA', provides for the rating on a PD basis to remain unchanged at a maximum of 'AAA' for the covered bonds provided the level of OC allows the cover pool to withstand 'AAA' stress levels and repay maturing covered bonds when due. The AP supporting Fitch's 'AAA' rating on the covered bonds is 91.8% which equals the program's current contractual AP. All else equal, the covered bonds rating could be maintained at 'AAA' as long as the issuer's IDR is rated at least 'A-', compared to 'BBB+' previously.

The level of AP supporting the ratings will be affected by, among other factors, the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuances. Therefore, it should not be assumed to remain constant.

With the exception of RBC, all of the covered bond programs are secured by residential mortgage loans insured by Canada Mortgage and Housing Corporation (CMHC). RBC's program is secured by uninsured mortgages. All cover pool assets are denominated in CAD, while the covered bonds are primarily denominated in foreign currencies including AUD, CHF, EUR and USD. The programs include interest rate and currency swap agreements between each of the guarantors (SPV) and the respective counterparty to minimize the cash flow mismatches. The initial counterparty for each program is the respective issuer.

For all programs, interest payments received on the cover assets are swapped into CDOR plus a margin. On the liability side, the interest rate and currency mismatches are fully hedged in the programs.

Additional information is available on 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:

--'Covered Bonds Rating Criteria', dated Aug. 12, 2011;

--'ResiLogic: U.S. Residential Mortgage Loss Model Criteria', dated Aug. 12, 2011;

--'Covered Bonds Counterparty Criteria', dated March 14, 2011.

Applicable Criteria and Related Research:

Covered Bonds Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648551

ResiLogic: U.S. Residential Mortgage Loss Model Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648169

Covered Bonds Counterparty Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=606185

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

CONTACT:

Fitch Ratings
Primary Analyst
Vanessa Purwin
Director
+1-212-908-0269
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Rachel Brach
Director
+1-212-908-0224
or
Committee Chairperson
Vito Natale
Senior Director
+44 20 3530 1304
or
Media Relations, Frankfurt am Main
Christian Giesen, + 49 (0) 69 7680 762 32
christian.giesen@fitchratings.com