DBRS Morningstar Confirms Ratings on CIBC Mellon Trust Company at AA, Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the ratings of CIBC Mellon Trust Company (CMT or the Company), including the Company’s Long-Term Issuer Rating at AA and Short-Term Issuer Rating at R-1 (high). The trend on all ratings is Stable. The Support Assessment (SA) is SA1, which reflects DBRS Morningstar’s expectation of continued and timely support from CMT’s most closely aligned parent, The Bank of New York Mellon (BNY Mellon; rated AA (high)/R-1 (high) with a Stable trend by DBRS Morningstar).

KEY RATING CONSIDERATIONS
Ranking as one of the largest custodians in Canada, CMT's strong franchise reflects its relationship with its two robust co-owners, BNY Mellon and Canadian Imperial Bank of Commerce (CIBC; rated AA/R-1 (high) with a Stable trend by DBRS Morningstar). Although anticipated support from both owners remains likely, DBRS Morningstar views the Company’s ratings as primarily driven by BNY Mellon, which is the most closely aligned parent, as CMT’s business is core to BNY Mellon and provides exposure to the Canadian asset-servicing business. On an intrinsic basis, DBRS Morningstar views CMT as strong, reflecting its scale and position in Canada, its low-risk balance sheet, as well as its deep service offering. In addition, CMT extensively leverages BNY Mellon's technology and operating platform to deliver its services to clients. The one-notch differential in ratings between the Company and BNY Mellon reflects typical notching for a noncritical entity operating in another jurisdiction with low cross-border risk.

RATING DRIVERS
Given that CMT’s ratings primarily reflect its 50% ownership by BNY Mellon, an upgrade of BNY Mellon's ratings would result in an upgrade to the ratings of CMT. Conversely, a ratings downgrade of BNY Mellon would result in a downgrade to CMT's ratings. In addition, any indication of a reduced ability or willingness to support CMT by BNY Mellon would result in a downgrade of the Company’s ratings.

RATING RATIONALE
CIBC Mellon represents the combination of two legal entities: CMT and its sister company, CIBC Mellon Global Securities Services Company (GSS). GSS provides a variety of asset services that are largely focused on custody, securities lending services, foreign exchange processing and settlement, treasury services, fund administration, and fund accounting. Although CMT and GSS are separate legal entities, they operate as a single firm, which is how the market views them. With more than $2 trillion in assets under administration, CIBC Mellon is exclusively focused on the asset-servicing needs of both national and international institutional investors within Canada.

CIBC Mellon has generated strong recurring earnings, as it benefits from a relatively stable, fee-based business model. Despite the challenging operating environment, CMT delivered another solid performance in F2021, with a return on equity of 10.4%. DBRS Morningstar expects client momentum and a higher interest rate environment to positively affect CIBC Mellon's earnings in the near to intermediate term.

CIBC Mellon’s operational and reputational risks are high because of the immense volume of transactions that are processed. The operational risk inherent in this business is further elevated, as CIBC Mellon depends on the technological functionality of its systems when servicing its clients. Handling these risks is the most critical challenge for management. However, these risks are mitigated, as CIBC Mellon has put in place a conservative risk management framework, which is further enhanced by oversight from both of its parent companies. CIBC Mellon possesses considerable cross-organizational expertise as both BNY Mellon and CIBC have risk representatives from their organizations who participate and sit on the Company’s risk committees. Moreover, credit risk is minimal, as the Company does not have a lending portfolio on its balance sheet.

The Company’s balance sheet fundamentals remain healthy. CMT’s funding and liquidity profile is underpinned by robust deposit funding and a substantial amount of liquidity in cash and high-quality liquid securities. The Company’s liquidity level is exceptional, with more than 95% of its assets typically in cash or high-quality liquid securities. Finally, capital levels remain well above regulatory minimums, with a CET1 ratio of 31.1% at YE2021.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) CONSIDERATIONS
Rating actions on BNY Mellon are likely to have an impact on this credit rating. ESG factors that have a significant or relevant effect on the credit analysis of BNY Mellon are discussed separately at https://www.dbrsmorningstar.com/issuers/15299.
There were no ESG factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 23, 2022; https://www.dbrsmorningstar.com/research/398692).

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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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