Approximately $31 billion of hybrids affected
Toronto, February 22, 2010 -- Moody's Investors Service downgraded its ratings on certain Canadian bank
hybrid securities, in line with its revised Guidelines for Rating
Bank Hybrids and Subordinated Debt published in November 2009.
Moody's downgraded the Canadian banks' non-cumulative perpetual
preferred securities and Innovative Tier 1 and Tier 2A Instruments,
with the exception of the Bank of Montreal's (BMO's),
for which the downgrade occurred in a previous rating action. This
concludes the review for possible downgrade that began on November 19,
2009. All other ratings and outlooks for the Canadian banks and
their subsidiaries remain unchanged.
A full list of the individual securities affected can be accessed through
this link:
http://v3.moodys.com/page/viewresearchdoc.aspx?docid=PBC_123338
Prior to the global financial crisis, Moody's had incorporated into
its ratings an assumption that support provided by national governments
and central banks to shore up a troubled bank would, to some extent,
benefit the holders of bank subordinated capital as well as the senior
creditors. The systemic support for these instruments has not been
forthcoming in many cases. The revised methodology largely removes
previous assumptions of systemic support, resulting in today's
rating action. In addition, the revised methodology generally
widens the notching on a bank hybrid's rating that is based on the
instrument's features.
RATING ACTION IN DETAIL
The starting point in Moody's revised approach to rating hybrid
securities is the Adjusted Baseline Credit Assessment (Adjusted BCA).
The Adjusted BCA reflects the bank's standalone credit strength,
including parental and/or cooperative support, if applicable.
The Adjusted BCA excludes systemic support. Moody's rating
action removes systemic support from Canadian bank hybrids and,
where applicable, adds an additional rating notch for those instruments
with non-cumulative coupon payments.
The affected securities issued by five Canadian banks, excluding
BMO, were revised or affirmed as follows:
Royal Bank of Canada (RBC: BFSR of B+, long-term
deposits Aaa / short-term deposits Prime-1; negative
outlook)
-- The Adjusted BCA for RBC is Aa2, consistent with
its BFSR of B+.
-- RBC's Tier 2A Securities were downgraded to A1
from Aa2. The two notch downgrade reflects the removal of systemic
support from these ratings. These securities have a preferred claim
in liquidation and their coupon payments are cumulative. Thus,
per Moody's revised methodology for bank hybrids, the rating
for these securities is two notches lower than the Adjusted BCA.
-- RBC Capital Trust and RBC Capital Trust II Innovative
Tier 1 Securities were downgraded to A2 from Aa2. These securities
have a preferred claim in liquidation and their coupon payments are non-cumulative.
Two notches of the downgrade reflect the removal of systemic support,
while Moody's added an additional notch to the downgrade to reflect
the non-cumulative coupon payments. Thus, per Moody's
revised methodology for bank hybrids, the rating for these securities
is three notches lower than the Adjusted BCA.
-- RBC's non-cumulative, perpetual preferred
shares were downgraded to A2 from Aa2. These securities have a
preferred claim in liquidation and their coupon payments are non-cumulative.
Two notches of the downgrade reflect the removal of systemic support,
while Moody's added an additional notch to the downgrade to reflect
the non-cumulative coupon payments. Thus, per Moody's
revised methodology for bank hybrids, the rating for these securities
is three notches lower than the Adjusted BCA.
Toronto-Dominion (TD; BFSR of B+, long-term
deposits Aaa / short-term deposits Prime-1; negative
outlook)
-- The Adjusted BCA for TD is Aa2, consistent with
its BFSR of B+.
-- TD's Tier 2A Securities were downgraded to A1 from
Aa2. Please see the RBC section (Tier 2A Securities) for the rationale.
-- TD Capital Trust III Innovative Tier 1 Securities were
downgraded to A2 from Aa2. Please see the RBC section (Innovative
Tier 1 securities) for the rationale.
-- TD Capital Trust IV Innovative Tier 1 Securities were
downgraded to A2 from Aa2. These securities have a preferred claim
in liquidation. A key feature in these securities is the automatic
conversion which can be triggered by the breach of certain capital triggers
or at the discretion of the bank's regulator. Thus,
these securities may become non-cumulative preferred shares in
a period of financial duress. Two notches of the downgrade reflect
the removal of systemic support. Moody's added an additional
notch to the downgrade to reflect both the likelihood of conversion of
these instruments into non-cumulative preferred shares and the
effective non-cumulative nature of these securities in a stress
scenario. Thus, per Moody's revised methodology for
bank hybrids, the rating for these securities is three notches lower
than the Adjusted BCA.
-- TD's non-cumulative, perpetual preferred
shares were downgraded to A2 from Aa2. Please see the RBC section
(non-cumulative preferred shares) for the rationale.
Bank of Nova Scotia (Scotiabank; BFSR of B, long-term
deposits Aa1 / short-term deposits Prime-1; stable
outlook)
-- The Adjusted BCA for Scotiabank is Aa3, consistent
with its BFSR of B.
-- Scotiabank Capital Trust Innovative Tier 1 Securities
were downgraded to A3 from Aa3. Please see the RBC section (Innovative
Tier 1 securities) for the rationale.
-- Scotiabank Tier 1 Trust Innovative Tier 1 Securities
were downgraded to A3 from Aa3. Please see the TD section (TD Capital
Trust IV Innovative Tier 1 Securities) for the rationale.
-- Scotiabank's non-cumulative, perpetual
preferred shares were downgraded to A3 from Aa3. Please see the
RBC section for the rationale.
National Bank of Canada (NBC; BFSR of B-, long-term
deposits Aa2 / short-term deposits Prime-1; stable
outlook)
-- The Adjusted BCA for NBC is A1, consistent with
its BFSR of B-.
-- NBC Asset Trust and NBC Capital Trust Innovative Tier
1 Securities were downgraded to Baa1 from A1. Please see the RBC
section (Innovative Tier 1 securities) for the rationale.
-- NBC's non-cumulative, perpetual preferred
shares were downgraded to Baa1 from A1. Please see the RBC section
(non-cumulative preferred shares) for the rationale.
Canadian Imperial Bank of Commerce (CIBC; BFSR of B-,
long-term deposits Aa2 / short-term deposits Prime-1;
negative outlook)
-- The Adjusted BCA for CIBC is A1, consistent with
its BFSR of B-.
-- CIBC Capital Trust Innovative Tier 1 Securities were
downgraded to Baa1 from A1. Please see the TD section (TD Capital
Trust IV Innovative Tier 1 Securities) for the rationale.
-- CIBC's non-cumulative, perpetual preferred
shares were downgraded to Baa1 from A1. Please see the RBC section
(non-cumulative preferred shares) for the rationale.
Of note, Moody's downgraded the long-term ratings of the
Bank of Montreal (BMO) and all its subsidiaries on January 22, 2010.
As part of this action, Moody's completed the review for downgrade
of BMO's hybrid capital instruments. Moody's downgraded BMO's
preferred stock securities (which include non-cumulative preferred
shares and other hybrid capital instruments) four notches to Baa1 from
Aa3. The first notch reflected the downgrade of BMO's unsupported/stand-alone
BFSR. The next three notches of the downgrade were a consequence
of implementing Moody's revised methodology for rating bank hybrid securities.
Please visit www.moodys.com to access the following documents
for additional information:
Moody's Special Comment: Canadian Bank Subordinated Capital Ratings
-- June 2009
Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated
Debt -- November 17, 2009
Frequently Asked Questions: Moody's Guidelines for Rating Bank Hybrid
Securities and Subordinated Debt -- November 17, 2009
The principal methodologies used in rating the Canadian banks and their
subsidiaries were "Bank Financial Strength Ratings: Global Methodology"
published in February 2007, "Incorporation of Joint-Default
Analysis into Moody's Bank Ratings: A Refined Methodology" published
in March 2007, and "Moody's Guidelines for Rating Bank Hybrid Securities
and Subordinated Debt" published in November 2009. These are available
on www.moodys.com in the Rating Methodologies sub-directory
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found in the Rating Methodologies sub-directory on Moody's
website.
New York
Robert Young
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Toronto
Peter Routledge
Senior Vice President
Financial Institutions Group
Moody's Canada Inc.
(416) 214-1635
Moody's lowers ratings on Canadian bank hybrid securities
