Fitch Affirms Ratings for 3 Canadian Mortgage Covered Bond Programs

Business Wire

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has affirmed 3 Canadian mortgage covered bond programs following their annual reviews which incorporate the agency's new Canadian Residential Mortgage Loan Loss Model Criteria released May 15, 2013. The ratings of the outstanding covered bonds issued by Canadian Imperial Bank of Commerce (CIBC, AA-/Stable/F1+), National Bank of Canada (NBC, A+/Stable/F1) and Royal Bank of Canada (RBC, AA/Stable/F1+) are affirmed at 'AAA' with Stable Outlook. Fitch rates three additional Canadian mortgage covered bond programs which will be analyzed under the new criteria shortly.

KEY RATING DRIVERS: CIBC's MORTGAGE COVERED BONDS

The AAA rating of CIBC's mortgage covered bonds is based on the issuer's Long-term Issuer Default Rating (IDR) of 'AA-', Fitch's Discontinuity Cap (D-Cap) of 3 (moderate high risk) and the program's contractual asset percentage (AP) of 92.7%, which provides more protection than Fitch's 'AAA' breakeven AP of 95.1%. It is sufficient to support the rating on a 'AAA' probability of default (PD) basis.

As of May 2013, CAD-equivalent 11 billion hard bullet bonds were outstanding under the program. They are secured by a cover pool consisting of CAD 11 billion Canada Mortgage and Housing Corporation (CMHC)-insured residential mortgages and CAD 2.8 billion National Housing Act Mortgage-Backed Securities (NHA-MBS), which carry a guarantee of timely payment from CMHC. The AAA breakeven AP is driven by a weighted average (WA) PD of 11% and a WA recovery rate (RR) of 96.5% on the cover pool in a AAA scenario, which takes into account the benefit of the CMHC insurance, on the mortgage loans. Because CMHC's obligations are guaranteed by the 'AAA' Canadian sovereign, the NHA-MBS were not assumed to default under an 'AAA' stress.

KEY RATING DRIVERS: NBC's MORTGAGE COVERED BONDS

The AAA rating of NBC's mortgage covered bonds is based on the issuer's Long-term IDR of 'A+', Fitch's D-Cap of 3 (moderate high risk) and the program's contractual AP of 93.2%, which provides more protection than Fitch's 'AAA' breakeven AP of 93.6%. It is supporting the rating on a 'AA+' PD basis plus 1 notch uplift for outstanding recoveries.

As of May 2013, approximately CAD-equivalent 3 billion soft bullet bonds were outstanding under the program. They are secured by a CAD 3.5 billion cover pool consisting of CMHC-insured Canadian residential mortgages. The AAA breakeven AP is driven by a WA PD of 29.5% and a WA RR of 96.5% on the cover pool in an 'AAA' scenario, which takes into account the benefit of the CMHC insurance.

KEY RATING DRIVERS: RBC's MORTGAGE COVERED BONDS

The rating of RBC's mortgage covered bonds is based on the issuer's Long-term IDR of 'AA', Fitch D-Cap of 3 (moderate high risk) and the program's contractual AP of 91.1%, which provides more protection than Fitch's 'AAA' breakeven AP of 95%. It is sufficient to support the rating on a 'AAA' PD basis.

As of May 2013, CAD-equivalent 10.6 billion soft bullet bonds were outstanding under the program. They are secured by a CAD 19.3 billion cover pool consisting of uninsured Canadian residential mortgages. The AAA breakeven AP is driven by a WA PD of 14.9% and a WA RR of 68.1% on the cover pool in an 'AAA' scenario.

RATING SENSITIVITIES: CIBC's and NBC's MORTGAGE COVERED BONDS

CIBC's covered bonds' rating would be vulnerable to a downgrade if any of the following occurred: (i) the IDR was downgraded by three notches to 'A-' , (ii) the D-Cap fell to 0 (full discontinuity), or (iii) the AP that Fitch takes into account in its analysis exceeded 95.1%.

NBC's covered bonds' rating would be vulnerable to a downgrade if any of the following occurred: (i) the IDR was downgraded by two notches to 'A-' , (ii) the D-Cap fell to 1 (very high risk), or (iii) the AP that Fitch takes into account in its analysis exceeded 93.6%.

For CIBC's and NBC's covered bonds, if CMHC lost the full backing of the Government of Canada, or if the Government of Canada's rating suffered a downgrade, Fitch would revise the credit given to the insurance provided by CMHC on the mortgage loans in the respective cover pools as well as to the NHA-MBS in the case of CIBC. This could lead to weaker liquidity as well as higher credit risk expectations for the cover pool. As a result, the D-Caps would likely decrease and the breakeven APs for the current covered bonds' ratings would likely decrease.

RATING SENSITIVITIES: RBC's MORTGAGE COVERED BONDS

RBC's covered bonds' rating would be vulnerable to a downgrade if any of the following occurred: (i) the IDR was downgraded by four notches to 'A-' , or (ii) the AP that Fitch takes into account in its analysis exceeded 95%. The covered bonds' rating could be maintained even if the D-Cap was reduced to 0 (full discontinuity), subject to a satisfactory level of AP, given the issuer's current IDR of 'AA' which enables the bonds to reach 'AAA' only taking recoveries into account.

Fitch breakeven AP for a given covered bonds' ratings will be affected, among others, by 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 cannot be assumed to remain stable over time.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Covered Bonds Rating Criteria' (Sept. 10, 2012);

--'Counterparty Criteria for Structured Finance and Covered Bonds ' (May 13, 2013);

--'Covered Bond Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum' (June 3, 2013);

--'Canadian Residential Mortgage Loan Loss Model Criteria' (May 15, 2013);

--'Global Criteria for Lenders' Mortgage Insurance in RMBS' (Sept. 7, 2012).

Applicable Criteria and Related Research:

Covered Bonds Rating Criteria - Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688092

Counterparty Criteria for Structured Finance and Covered Bonds

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=707155

Canadian Residential Mortgage Loan Loss Model

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708242

Global Criteria for Lenders - Mortgage Insurance in RMBS

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684475

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=794848

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Contact:
Fitch Ratings
Primary Analyst (CIBC's, NBC's and RBC's mortgage covered bonds)
Vanessa Purwin
Senior Director
+1-212-908-0269
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst (CIBC's and NBC's mortgage covered bonds)
Roger Lin
Associate Director
+1 212 908 0778
or
Secondary Analyst (RBC's mortgage covered bonds)
Rachel Brach
Director
+1-212-908-0224
or
Committee Chairperson (CIBC's, NBC's and RBC's mortgage covered bonds)
Helene Heberlein
Managing Director
+33-1-44-29-9140
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
Email: brian.bertsch@fitchratings.com
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