DBRS Morningstar Confirms Manulife Bank of Canada’s Long-Term Ratings at AA (low), Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the ratings of Manulife Bank of Canada (Manulife Bank or the Bank), including the Long-Term Issuer Rating at AA (low) and the Short-Term Instruments ratings at R-1 (middle). The trend on all ratings is Stable. Manulife Bank’s ratings reflect the expectation of timely internal support from The Manufacturers Life Insurance Company (MLI or the Parent; rated AA with a Stable trend by DBRS Morningstar).

KEY RATING CONSIDERATIONS
As a wholly owned, strategically important subsidiary of MLI, Manulife Bank’s ratings are primarily driven by the Financial Strength Rating of the Parent. DBRS Morningstar views Manulife Bank as strong, reflecting the Bank’s position as the tenth-largest bank in Canada, its innovative product offering including a nonbranch model that is well suited to serve clients’ needs remotely during the Coronavirus Disease (COVID-19) pandemic, as well as its key investments in technology. As per DBRS Morningstar’s insurance methodology, the one-notch rating differential between MLI and Manulife Bank reflects the standard notching for a noninsurance subsidiary.

RATING DRIVERS
Given that Manulife Bank’s ratings are notched from MLI’s Financial Strength Rating (FSR) rating, any ratings upgrade of MLI would result in a ratings upgrade of Manulife Bank. Conversely, a downgrade of MLI’s FSR would also result in a ratings downgrade of Manulife Bank. In addition, any indications of a reduced ability or willingness of MLI to support Manulife Bank would result in a ratings downgrade.

RATING RATIONALE
Manulife Bank’s ratings reflect its position as an important name-bearing subsidiary that enables MLI to provide banking products and services to its clients. The Bank is an integral element of MLI’s strategy in Canada, with the mutually beneficial relationship between the two entities supporting their individual franchises. Manulife Bank is linked to its Parent through the significant integration of the Bank with MLI’s branding and distribution through MLI’s financial advisors network in Canada, as well as shared services and information technology systems. DBRS Morningstar notes that Manulife Bank is also well integrated into the overall risk management infrastructure of its Parent, which provides support to the ratings.

Manulife Bank has generated solid recurring earnings, which have been sufficient to absorb losses and to fund strategic investments, even during the peak of the pandemic. However, the Bank remains reliant on net interest income, so earnings could be pressured as a result of the prevailing low interest rate environment. With an efficiency ratio of 52% in F2020, Manulife Bank’s operating efficiency has been strong, largely reflecting its low-cost distribution structure. DBRS Morningstar notes that although the Bank’s profitability has remained resilient during the pandemic, earnings could still face headwinds in the medium term.

Overall, DBRS Morningstar views the Bank’s risk profile as conservative, reflecting Manulife Bank’s focus on high-quality retail clients that contributes to solid credit performance. Although short-term uncertainty remains given the resurgence in the number of coronavirus cases as well as provincial governments re-enacting stricter social distancing measures amid new variants, delinquencies and credit losses remain well within the Bank’s risk appetite.

Manulife Bank has a strong funding and liquidity profile, which is underpinned by a high level of retail deposits. This is complemented by secured wholesale funding, including a well-established deposit notes program and government-sponsored securitization vehicles. Moreover, the Bank also maintains a strong liquidity position that is well above regulatory requirements.

Manulife Bank’s capitalization remains comfortably above regulatory minimums. In Q2 2021, the Bank’s CET1 ratio was 14.7%, while the Tier 1 and Total Capital ratios were 17.2% and 17.3%, respectively These metrics provide the Bank with a significant capital cushion to cover potential losses arising from the ongoing impact of the pandemic. DBRS Morningstar notes that Manulife Bank’s capitalization continues to compare favourably with those of small-to-mid-sized peers in Canada.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (July 16, 2021; https://www.dbrsmorningstar.com/research/381667). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at www.dbrsmorningstar.com.

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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