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Rating Action:

Moody's lowers ratings on Canadian bank hybrid securities

22 Feb 2010

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
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