DBRS Confirms Ratings of Manulife Bank of Canada

DBRS Limited (DBRS) confirmed the Long-Term Issuer Rating, Long-Term Senior Debt and the Long-Term Deposits of Manulife Bank (the Bank) at A (high), as well as the Short-Term Issuer Rating and Short-Term Instruments at R-1 (middle). All trends are Stable.

KEY RATING CONSIDERATIONS
The confirmation of the ratings of Manulife Bank reflects DBRS’s expectation of support, if needed, from the Bank’s parent, The Manufacturers Life Insurance Company (MLI), which is rated at AA (low) by DBRS. The expectation of support is based on the importance of the Bank in widening MLI’s product and service offering, and the Bank sharing the parent’s name. As a result, the rating of the Bank at A (high) is positioned one notch below the parent’s Financial Strength Rating.

RATING DRIVERS
Ratings of Manulife Bank could be positively affected as a result of an upgrade of MLI’s ratings. Negative ratings pressure could arise from a downgrade of MLI’s rating or due to a diminished role of the Bank within MLI.

RATING RATIONALE
The support assessment and the rating for the Bank reflect several considerations. First, the Bank is an important subsidiary that enables MLI to provide banking products and services to its clients and is an integral element of MLI’s strategy in Canada. The mutually beneficial relationship between the two supports their individual franchises. The Bank represents an attractive means of strengthening MLI’s product suite and enhancing its relationship with its advisor channel and clients, while providing an opportunity for cross-selling. Second, the Bank is also linked to MLI through the significant integration of the Bank with MLI’s branding, channel distribution, shared services and information technology systems. Third, the Bank and MLI have a common prudential regulator, the Office of the Superintendent of Financial Institutions (OSFI), which provides some assurance that any issues arising at the Bank or MLI would be appropriately addressed from a regulatory perspective. Fourth, the Bank is important, but modest in scale relative to MLI, so that any need for support for the Bank could be met promptly by MLI, which is a strong credit.

Also considered in the analysis is the Bank’s fundamental credit strength, which DBRS views as good. Manulife Bank has a good earnings platform, a low risk profile, appropriate funding and liquidity, and strong capitalization. The Bank’s funding and liquidity capabilities have broadened over the past several years, with a well-diversified funding profile split between wholesale funding issuances, including securitization programs, and an expanding suite of retail products. Management is maintaining strong capital levels at the Bank.

Manulife Bank’s challenges include its reliance on a relatively narrow, though broadening, range of key products, and its reliance on spread income, which is generally less stable than fee-based sources of income. In order to compete more effectively by improving the customer experience, the Bank has chosen to embark on several initiatives, including enhancing its digital offerings, expanding its product suite, investing in customer-facing technology, strengthening its ABM network through strategic distribution partnerships and expanding distribution. These new initiatives have led to higher than usual expenses in the past three years. Nevertheless, the Bank continues to deliver strong earnings through controlled loan and deposit growth, while incurring minimal credit losses as a result of the strong asset quality of its primarily residential real estate secured lending book. The recent increase in interest rates by the Bank of Canada, and the Bank’s continued emphasis on expanding its National Housing Act mortgage-backed securities (NHA MBS) program, has helped it maintain its spread income. However, it faces some challenges, including a potential slowdown in mortgage growth. Losses in general have been manageable, which can be attributed to the Bank’s strong underwriting.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents below or by contacting us at info@dbrs.com.

The applicable methodologies are the Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (January 2018) and the Global Methodology for Rating Banks and Banking Organisations (July 2018), which can be found on dbrs.com under Methodologies.

Lead Analyst: Victor Adesanya, Vice President, Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer – Global FIG and Sovereign Ratings

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.