Banking Market Canada - Financial Special - NORD/LB
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Fixed Income Research
Financial Special
18 May 2016
Banking Market
Canada
NORD/LB Research portal PROFI Bloomberg code: NRDR
Please see important disclosure on the last pages.Financial Special 18 May 2016
Financials Canadian Banking Market
NORD/LB estimation Financial market CA-Senior Fin. vs. iBoxx € Senior Fin.
350
Positive 5y CDS vs. Germany
Asset Swap Spread Mid in BP
300
250
Country ratings NA NA
200
Government 150
LT Outlook vs. Bund
bond yield 100
50
Fitch AAA STABLE 2y 0,698 1,196 0
-50
Moody’s Aaa STABLE 5y 0,924 1,231 -100
0 2 4 6 8 10 12 14
Maturity Years YTD
S&P AAA STABLE 10y 1,543 1,272 iBoxx € SNR FIN CA
As at: 19.05.16; Source: Bloomberg As at: 26 April 16 11:09 As at: 26 April 16 11:09 Time (CET);
(CET); Source: Bloomberg Source: Bloomberg, NORD/LB Fixed Income Research
Analyst: Canada (ratings: Moody’s: Aaa; Fitch: AAA; S&P: AAA) is the second largest
Michaela Hessmert country on Earth. However, its population density is among the lowest in the
world. The majority of Canada’s population of over 35 million live in the
major cities of Toronto, Montréal, Vancouver and the capital city Ottawa.
Canada is among the most affluent nations on the planet and boasts consid-
erable natural resources. Its most important trading partner is by far the
USA. The service sector makes the largest contribution to Canada’s GDP
(January 2016: +1.5% y/y). The broadly diversified Canadian economy has
proven to be incredibly resistant in the past few years. In addition to the
commodities sector, Canada has a competitive manufacturing industry and a
well-developed financial market. While many global banks were forced to
significantly reduce their risk profiles during the global financial crisis,
Canadian banks, which are strongly focused on their stable domestic mar-
ket, were able to use surplus capital to diversify on an international basis.
Government Yields Canada GDP Canada Y/Y
4
5
3,5
4
3 3
2,5 2
1
2
0
%
1,5 -1 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
1 -2
-3
0,5
-4
0 -5
2010 2011 2012 2013 2014 2015 2016
GDP Canada Y/Y
10Y CAN Govt 5Y CAN Govt 2Y CAN Govt
As at: 20 April 2016 As at: 20 April 2016
Source: Bloomberg, NORD/LB Fixed Income Research Source: Bloomberg, NORD/LB Fixed Income Research
Active member of the FSB The Office of the Superintendent of Financial Institutions (OSFI), Canada’s
and BCBS foremost banking supervisory body, is active in international organisations
such as the Financial Stability Board (FSB) and the Basel Committee on
Banking Supervision (BCBS), in order to offer a Canadian perspective on
global regulations.
NORD/LB Fixed Income Research Page 2 of 25Financial Special 18 May 2016
Canadian banking superviso- The Canadian banking supervisory authority was established in 1987. As an
ry body OSFI independent federal authority, it serves to ensure the regulation and
supervision of financial institutes. Among other aspects, the OSFI regulates
and monitors all Canadian DTIs (deposit taking institutions), including banks,
foreign bank branches, trust and loan companies and cooperatives. The
OSFI’s activities can be roughly divided into two main areas. First, it
identifies institute-specific risks and trends within the framework of its
monitoring activities and it will intervene if necessary. Second, the
promotion of a secure and solid financial system via directives and
recommendations in addition to monitoring and assessing systemic risks as
part of its regulation efforts. A strength of the Canadian banking system is
the conservative nature of supervision, which compelled domestic institutions
to adopt and comply with Basel III regulations on capital and liquidity at an
early stage.
Supervision of D-SIBs
Rating
Bloomberg Total Assets
D-SIB (Moody's / Fitch / Internet link
Ticker CAD (m)
S&P)
Bank of Montreal (BMO) BMO CN 641,881 Aa3 / AA- / A+ www.bmo.com
Bank of Nova Scotia BNS CN 856,497 Aa3 / AA- / A+ www.scotiabank.com
Canadian Imperial Bank of Commerce (CIBC) CM CN 463,309 Aa3 / AA- / A+ www.cibc.com
National Bank of Canada (NBC) NA CN 216,090 Aa3 / A+ / A www.nbc.ca
Royal Bank of Canada (RBC) RY CN 1,074,208 Aa3 / AA / AA- www.rbc.com
Toronto-Dominion Bank (TD) TD CN 1,104,373 Aa1 / AA- / AA- www.td.com
Source: Bloomberg, SNL, NORD/LB Fixed Income Research
National systemically im- The supervisory body identifies six Canadian financial institutes as national
portant banks (D-SIB) systemically important banks (D-SIB). These include: Bank of Montreal,
Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank
of Canada, Royal Bank of Canada and Toronto-Dominion Bank. These six
institutes account for around 90% of total banking assets in the country.
D-SIBs have been required since January 2016 to retain an additional capital
buffer in the form of CET1 capital amounting to 1% of RWA. This increased
capital requirement is reviewed regularly in the context of national and
international developments. Supervision of the D-SIBs via the supervisory
body is intensive, because the institutes have an increased risk profile just
on account of their size and more complex business models.
Minimum Capital Requirements
2013 2014 2015 2016 2017 2018 2019 2020 2021
CET1 (%) 3.5 4.0 4.5 4.5 4.5 4.5 4.5 4.5 4.5
Tier 1 capital (%) 4.5 5.5 6.0 6.0 6.0 6.0 6.0 6.0 6.0
Capital conserva-
0.625 1.25 1.875 2.50 2.50 2.50
tion buffer (%)
Total capital (%) 8.0 8.0 8.0 8.625 9.25 9.875 10.5 10.5 10.5
Source: OFSI, NORD/LB Fixed Income Research
NORD/LB Fixed Income Research Page 3 of 25Financial Special 18 May 2016
Bank of Canada The Bank of Canada (BoC) actively promotes an efficient financial market.
To this end, it provides numerous central bank services such as liquidity
facilities, lender of last resort functions, monitoring of clearing and settlement
systems, analysis and research (e.g. half-yearly financial system review) and
collaboration with national and international decision-making bodies for the
further development of financial market policy.
Financial System Review With the half-yearly Financial System Review (FSR), the BoC pursues the
objective of ensuring the long-term stability of the domestic financial system.
This primarily occurs via continual monitoring of potential risk factors which
could compromise stability of the financial system. In the last FSR published
in December 2015, the BoC stated that the financial system was stable and
efficient. However, it did point out some potential weak points.
1. Increased debt levels among Canadian private households
Income development has struggled to keep up with a financial
environment characterised by low interest rates, rising house prices and
growth in mortgage loans. In addition, the BoC has observed a
concentration of younger households which are highly indebted and
have fewer opportunities to react in financial terms to job losses or a
hike in interest rates. For this reason, the central bank assesses the risk
for this group as being particularly increased during times of crisis.
However, the BoC assumes that the most likely scenario is a
successive reduction of this risk parameter, because both economic
and income development are trending positively at the moment and
interest rates are slowly beginning to normalise again.
2. Disparities in the Canadian property market
The rise in private debt levels is directly linked to the growth in lending
which in turn can be attributed to continually rising house prices. The
sharpest price rises have been observed in the regions of Vancouver
and Toronto, making these areas particularly vulnerable to unwelcome
surprises. The BoC again assumes that the most likely scenario is a
successive reduction in these disparities.
3. Liquidity in the fixed income market
Bond markets are increasingly perceived as being susceptible to
liquidity shocks. A major drop off in market liquidity can strengthen price
trends and cause increased volatility and, in turn, lead to adjustments to
investor portfolios, which could see potential spillover effects into other
asset classes.
NORD/LB Fixed Income Research Page 4 of 25Financial Special 18 May 2016
Capitalisation and Capitalisation of Canadian banks has slightly improved in recent years and is
asset quality fundamentally solid now. From a European perspective, the capital buffer
against potential shocks could be even stronger. However, a positive aspect
is the institute’s capacity to generate capital internally. In recent years, banks
have increasingly sought to diversify on an international basis and, in doing
so, have sourced increased earnings potential, albeit this entails increased
risk exposure than is present on the domestic market. In comparison with
their international counterparts, Canadian banks’ asset quality is good and
stable. The low risk profile of the credit portfolios can historically be
explained by the fact that a large proportion of the mortgage loan portfolio is
attributable to the robust domestic market. In addition, lending to corporate
customers accounts for just 15% of total lending. The portfolio is also well
diversified. Individual exposures within the energy sector may potentially
come under pressure on account of market developments. The non-
performing loans ratio (NPL/loans) is very low for all D-SIBs, which is again
indicative of the good asset quality. In addition, the coverage ratio
(reserves/NPLs) is relatively high. In future, global economic development
and the dynamics of domestic market growth will proceed above all against a
backdrop of high levels of private household indebtedness. The provision of
unsecured consumer loans would initially suffer in the event of an economic
downturn. With interest rates set to continue rising, this may well have an
effect on the cost of servicing debts and the affordability of housing. In this
scenario, a moderate rise would not be the problem, but an interest rate
shock would be another matter entirely. However, we regard the probability
of such an event to be unlikely.
Asset quality of Canadian D-SIBs – an overview
Date BMO BNS CIBC NBC RBC TD
2015 FY 1,959 4,658 1,419 457 2,285 3,244
NPLs in CAD
2014 FY 2,048 4,200 1,434 486 1,977 2,731
(m)
2013 FY 2,544 3,701 1,547 395 2,201 2,692
2012 FY 2,976 3,622 1,867 387 2,250 2,518
TREND 2012 – 2015 ▼ ▲ ▼ ▲ ► ▲
2015 FY 0.60 0.97 0.50 0.43 0.48 0.58
NPLs / Loans
2014 FY 0.70 0.95 0.55 0.50 0.45 0.56
in %
2013 FY 0.93 0.89 0.62 0.44 0.54 0.59
2012 FY 1.20 0.99 0.76 0.46 0.59 0.60
TREND 2012 – 2015 ▼ ► ▼ ▼ ▼ ►
2015 FY 92.96 90.10 117.69 124.51 88.80 105.86
Reserves /
NPLs in %
2014 FY 83.35 86.69 115.76 124.28 100.86 110.88
2013 FY 64.70 88.44 109.76 146.33 89.00 106.05
2012 FY 56.32 82.19 99.63 149.10 88.71 105.00
TREND 2012 – 2015 ▲ ▲ ▲ ▼ ► ►
Source: SNL, NORD/LB Fixed Income Research
NORD/LB Fixed Income Research Page 5 of 25Financial Special 18 May 2016
CET 1 ratio ROAE
12,00 25,00
10,00
20,00
8,00
15,00
6,00
%
%
10,00
4,00
5,00
2,00
0,00 0,00
BMO BNS CIBC NBC RBC TD BMO BNS CIBC NBC RBC TD
2013Y 2014Y 2015Y 2013Y 2014Y 2015Y
As at: 20 April 2016 As at: 20 April 2016
Source: SNL, NORD/LB Fixed Income Research Source: SNL, NORD/LB Fixed Income Research
Profitability An international comparison reveals that Canadian banks perform well in
respect of their profitability. The return on average equity (ROAE) is in the
double-digit range across the board. Stress factors include weak global
growth, falling commodities prices, the low interest environment as well as
rising regulatory costs. As excess capital cannot be exclusively used to
further expand domestic banking activities, some Canadian institutes have
decided to pursue a policy of international diversification, despite the fact that
this entails increased risks.
Efficiency ratio Net interest margin
66,00 2,50
64,00
62,00 2,00
60,00
1,50
58,00
%
%
56,00
1,00
54,00
52,00 0,50
50,00
48,00 0,00
BMO BNS CIBC NBC RBC TD BMO BNS CIBC NBC RBC TD
2013Y 2014Y 2015Y 2013Y 2014Y 2015Y
As at: 28 April 2016 As at: 28 April 2016
Source: SNL, NORD/LB Fixed Income Research Source: SNL, NORD/LB Fixed Income Research
NORD/LB Fixed Income Research Page 6 of 25Financial Special 18 May 2016
Liquidity and funding The liquidity and funding situation of the Canadian banking system is
problem free. The national systemically important banks profiled here all
comply with the minimum liquidity ratio required by the OSFI (Liquidity
Coverage Ratio - LCR) in accordance with Basel III (introduction in January
2015; level > 100%). Despite the stable deposit basis (see loan-to-deposit
ratio), Canadian banks are dependent on capital market funding. Since 2014,
the institutes have supplemented their funding mix with EUR-denominated
covered bond issues. The background to this development was the
introduction of covered bond legislation following which all major Canadian
issuers have registered with the Canada Mortgage & Housing Corporation
(CMHC) in addition to a cheap issuing environment with beneficial EUR-CAD
basis swap rate. Issues of senior unsecured bonds have recently declined,
not least because of regulatory obstacles. In addition to the absence of LCR-
eligibility, the planned bail-in regime may well have an effect above all on
future issuing activity. Further details on the bail-in regime are expected in
the course of this year. We are of the view that covered bonds stand to
fundamentally benefit from the regulatory disadvantages related to senior
unsecured bonds. As the only D-SIB, Toronto-Dominion Bank issued a fixed-
coupon, EUR-denominated senior unsecured benchmark bond
(XS1375980197) with a maturity of five years at an issue spread of ms
+68bp in February this year (2 May 2016 15:10h CET: ASW mid: 43.6bp).
Liquidity Coverage Ratio and Loan to Deposit Ratio (FY 2015)
In % BMO BNS CIBC NBC RBC TD
LCR 130 124 118.9 131 127 126
LD ratio NA 76.8 86.5 82.6 68.0 78.8
Source: OFSI, NORD/LB Fixed Income Research
Conclusion The Canadian financial system is robust and its banks can boast healthy
balance sheets. Funding via the capital market is comparatively cheap.
However, the domestic financial system is exposed to some external risk
factors. These include, among others, the development of the global
economy and commodities prices, increased risk appetite on the part of
investors on account of the persistent low interest environment (hunt for yield
pickups) and geo-political risks. Above all, the Canadian banking market
proved its stability during the global financial crisis. No institute required state
support (bail-out) or was threatened with collapse. In relation to profitability,
Canadian institutes play a leading role in the global economy. Profitability
(measured taking the ROAE) for all six major Canadian banks lies clearly in
double-digit territory. The structure of the planned bail-in regime will be of
particular importance to the senior unsecured bond portfolios of the
institutions portrayed here. On account of the solid capitalisation and risk-
averse business models, we fundamentally identify no increased risk for
investors on the Canadian market.
NORD/LB Fixed Income Research Page 7 of 25Financial Special 18 May 2016
Analysts: Michaela Hessmert/Melanie Kiene
Canada Bank of Montreal
Issuer ratings The Bank of Montreal (BMO) is Canada’s oldest bank. Measured in terms of assets, it
LT is among the five largest banks in the country and the ten largest in North America as a
Outlook
whole. BMO ranks among the six national systemically important banks (D-SIB) in
Fitch AA- Stable
Canada. In geographical terms, the bank focuses on North America, particularly Cana-
Moody’s Aa3 Negative da and the U.S. Midwest. Here, BMO offers a broadly diversified product portfolio,
S&P A+ Stable ranging from retail banking and wealth management to investment banking and insur-
As at 12 May 2016 ance business. BMO’s 1,500 branches and nearly 47,000 employees serve more than
Source: Bloomberg 12 million customers worldwide. Outside North America, BMO operates in selected
European, Asian and Middle Eastern markets. The bank’s activities are divided into
Key facts four segments: “Canadian/U.S. Personal and Commercial Banking” (P&C), “Wealth
Homepage: Management”, “BMO Capital Markets” and “Corporate Services”. The Canadian P&C
www.bmo.com business alone contributed 42% to the total adjusted net income as at Q1 2016 (31
Bloomberg ticker: January) and recorded impressive growth in both lending business (+5% yoy) and de-
BMO CN posits (+6% yoy). The credit quality is very good (NPL ratio: 0.62%). Capitalisation is
5Y-Mid-CDS in bp: also solid, with a CET1 ratio of 10.1% for Q1 2016 (Q4 2015: 10.7%). In this regard, the
NA decline in comparison with Q4 2015 is above all attributable to the acquisition of the
transport financing business of General Electric Capital Corporation, which was com-
As at 12 May 2016
Source: Bloomberg, BMO pleted in December 2015. In contrast, the U.S. Business loan portfolio was strength-
ened (+23% yoy), while its exposure was further diversified.
Balance sheet summary Debt type summary
(EURm) 2012Y 2013Y 2014Y 2015Y
1%
Net Loans to 16%
Customers
189.755 190.962 206.869 223.477 32%
(€000)
Total Securities 99.904 95.749 101.470 90.649 Senior Debt – Covered Bonds 7.295.256
Other Senior Debt 11.618.548
Total Deposits 251.019 259.726 278.307 303.394 Subordinated Debt 3.707.950
Subsidiary Trust Preferred 351.640
Tier 1 Common GIC-backed Note 0
16.698 14.967 15.874 17.745 Total 22.973.394
Capital
Total Assets 404.956 378.654 416.771 444.447
51%
Total Risk-weighted
158.398 151.656 157.835 165.983
Assets
Income statement summary Debt maturity profile
(EUR m) 2012Y 2013Y 2014Y 2015Y 6.000.000
Net Interest Income 6.892 6.461 5.646 6.215 5.000.000
Trading Account 4.000.000
790 632 646 700
Income
(€000)
3.000.000
Net Trading Income 1.026 972 878 943
2.000.000
Other Expense 1.046 1.558 2.029 2.035
Reserves for Impaired 1.000.000
367 342 300 271
Customer Loans
0
Pre-tax Profit 3.879 3.909 3.565 3.788 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026+
Company ratios Capital structure
In % 2012Y 2013Y 2014Y 2015Y 100%
Net Interest Margin 2,00 1,86 1,66 1,60 80%
60%
ROAE 14,38 13,73 13,01 11,75
40%
Cost-to-Income 60,02 63,34 68,08 68,26
20%
Liquidity Coverage Ratio NA NA NA 130,00
0%
IFRS Tier 1 Leverage Ratio NA NA NA NA 2015Y 2014Y 2013Y 2012Y
Tier 1 Common Capital Tier 1 Capital Tier 2 Capital
Core Tier 1 Ratio 10,54 9,90 10,10 10,70 T3: Other Tier 3 Adjustments T3: Tier 3 Subordinated Debt
Gross Impaired Loans/ Loans Total Capital
NA NA NA NA 23.946 22.604 20.800 23.671
at Amortised Cost (€mm)
As at 12 May 2016 15:17 (CET); Source: Bloomberg (redemption profiles), SNL, NORD/LB Fixed Income Research
Challenges/strengths Risks/weaknesses
+ High asset quality; strong market position – Private household debt; falling oil prices
+ Geographic diversification U.S. expansion – High proportion of volatile capital market income
NORD/LB Fixed Income Research Page 8 of 25Financial Special 18 May 2016
Analysts: Michaela Hessmert/Melanie Kiene
Canada Bank of Nova Scotia
Issuer ratings The Bank of Nova Scotia (BNS; brand name: Scotiabank) belongs to the “Big Five” of
LT the Canadian banking market and is regarded as a national systemically important
Outlook
bank. The bank’s activities are broadly diversified with branches in more than 50 coun-
Fitch AA- Stable
tries, with Canada assuming the lead role (more than 1,100 of the nearly 3,200 branch-
Moody’s Aa3 Negative es). BNS’s lines of business are divided between “Canadian Banking” (~50% of net
S&P A+ Stable profit), “International Banking” (~30%) and “Global Banking” (~20%). Maintaining a
As at 12 May 2016 presence in Latin America, the Caribbean and Central America, BNS’s “International
Source: Bloomberg Banking” segment is of greater importance than its Canadian counterparts. Services
offered to BNS’s 23 million customers include private and corporate banking, invest-
Key facts ment banking and capital market operations in addition to wealth management and
Homepage: private banking. Nearly half of BNS’s credit portfolio is composed of private mortgages.
www.scotiabank.com In an attempt to increase profitability, BNS increasingly relies on external growth in
Bloomberg ticker: more dynamic markets and more high-yield operations. In this way, acquisitions were
BNS CN concluded for the financial services business of the Chile-based Cencosud SA (51%; in
5Y-Mid-CDS in bp: May 2015), the Canadian credit card portfolio of JPMorgan Chase (in Nov. 2015) and
NA the private and corporate banking segment of Citigroup in Panama and Costa Rica (in
Feb. 2016), among other deals. As at Q1 2016, the CET1 ratio (fully loaded) was at
As at 12 May 2016
Source: Bloomberg, NBS 10.1% (Q1 2015: 10.3%) and the leverage ratio amounted to 4.0% (Q1 2015: 4.1%).
Balance sheet summary Debt type summary
(EUR m) 2012Y 2013Y 2014Y 2015Y
13% 2%
Net Loans to
Customers
282.046 291.504 310.683 330.260 39%
Total Securities 83.367 83.561 94.890 84.195 (€000)
Senior Debt – Covered Bonds 19.940.708
Other Senior Debt 23.053.063
Total Deposits 359.544 365.270 392.574 417.113 Subordinated Debt 6.402.951
Subsidiary Trust Preferred 952.501
Tier 1 Common
Capital #WERT ! 18.585 23.889 25.595 GIC-backed Note
Total
0
50.349.223
Total Assets 515.742 524.321 570.412 593.050 46%
Total Risk-weighted
195.506 203.234 222.630 248.890
Assets
Income statement summary Debt maturity profile
(EUR m) 2012Y 2013Y 2014Y 2015Y 14.000.000
12.000.000
Net Interest Income 7.688 8.451 8.378 9.285
Trading Account 10.000.000
822 821 617 698
Income 8.000.000
(€000)
Net Trading Income 1.426 1.548 1.549 1.642 6.000.000
Other Expense 1.093 1.166 1.452 1.501 4.000.000
Reserves for Impaired 2.000.000
1.248 1.335 1.556 1.782
Customer Loans
0
Pre-tax Profit 6.137 6.215 6.332 6.430 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026+
Company ratios Capital structure
In % 2012Y 2013Y 2014Y 2015Y 100%
Net Interest Margin 1,72 1,68 1,70 1,70 80%
60%
ROAE 18,13 15,50 15,30 13,99
40%
Cost-to-Income 55,49 54,29 54,88 54,23
20%
Liquidity Coverage Ratio NA NA NA 124,00
0%
IFRS Tier 1 Leverage Ratio NA NA NA NA 2015Y 2014Y 2013Y 2012Y
Tier 1 Common Capital Tier 1 Capital Tier 2 Capital
Core Tier 1 Ratio NA 9,10 10,80 10,30 T3: Other Tier 3 Adjustments T3: Tier 3 Subordinated Debt
Gross Impaired Loans/ Loans Total Capital
1,02 0,91 0,98 1,01 33.395 30.863 27.386 32.565
at Amortised Cost (€mm)
As at 12 May 2016 15:17 (CET); Source: Bloomberg (redemption profiles), SNL, NORD/LB Fixed Income Research
Challenges/strengths Risks/weaknesses
+ Diversified earnings profile – Private household debt; falling oil prices
+ Good credit quality – Dependence on capital market funding
+ Strong market position in Canada – Increased risk appetite
NORD/LB Fixed Income Research Page 9 of 25Financial Special 18 May 2016
Analysts: Michaela Hessmert/Melanie Kiene
Canada Caisse centrale Desjardins du Québec
Issuer ratings Caisse centrale Desjardins (CCD) is part of the cooperative Desjardins Group and
LT assumes the role of financing company. In addition to the Fédération des caisses
Outlook
Desjardins du Québec (FCDQ), which holds 95% of the shares in Caisse centrale
Fitch AA- Stable
Desjardins, the insurance business centred the Western Financial Group is also part of
Moody’s Aa2 Negative the Group. Caisse centrale Desjardins operates in the areas of business: “Business
S&P A+ Stable and Institutional Services” (financial services and products for medium and large enter-
As at 12 May 2016 prises, public bodies and administrations), “Desjardins Group Treasury” (funding for the
Source: Bloomberg Desjardins Group) and “Other”. An additional remit of Caisse centrale Desjardins is its
function as a clearing house for the member “caisses” and other Group members. As a
Key facts subsidiary of the Desjardins Group, Caisse centrale Desjardins must always be viewed
Homepage: in the context of the cooperative financial group as a whole. This structure includes
www.desjardins.com around 800 business and service centres, primarily in Québec and Ontario, serving
Bloomberg ticker: more than 7 million customers and members. In Québec, Caisse centrale Desjardins
2733413Z CN achieves exceptionally high market shares in the areas of private savings (43% as at
5Y-Mid-CDS in bp: December 2015), private mortgage financing (36%) and agricultural loans (40%). Capi-
NA talisation for both Caisse centrale Desjardins (CET1 ratio: 14.7% as at December
2015) and the Group as a whole (CET1 ratio: 16%; target value: 15%; leverage ratio:
As at 12 May 2016
Source: Bloomberg, CCD 7.8%) is above average.
Balance sheet summary Debt type summary
(EUR m) 2012Y 2013Y 2014Y 2015Y 6% 36%
Net Loans to
13.891 15.413 22.410 23.685
Customers
(€000)
Total Securities 7.625 7.865 8.587 9.987 Secured 5.630.887
Unsecured 9.039.312
Total Deposits 17.184 18.644 25.312 27.694 Subordinated Debt -
Other Debt 957.946
Tier 1 Common Government & Bank GTD -
1.438 1.469 1.965 2.024
Capital Total 15.628.145
Total Assets 22.293 23.763 31.650 34.339 58%
Total Risk-weighted
8.723 10.110 14.433 13.751
Assets
Income statement summary Debt maturity profile
(EUR m) 2012Y 2013Y 2014Y 2015Y 7.000.000
Net Interest Income 217 188 195 232 6.000.000
5.000.000
Net Fee & Commission
19 18 21 20
Income 4.000.000
(€000)
Net Trading Income -11 25 42 51 3.000.000
2.000.000
Operating Expense 107 110 113 135
1.000.000
Problem Loans (€000) 16 10 10 7
0
2016 2017 2018 2019 2020 2021 2022 2023 2024
Pre-tax Profit 115 122 129 161
Company ratios Capital structure
In % 2012Y 2013Y 2014Y 2015Y 100%
Net Interest Margin 0,96 0,81 0,72 0,65 80%
60%
ROAE 7,51 8,18 7,35 7,57
40%
Cost-to-Income 46,96 47,18 43,40 44,27
20%
Liquidity Coverage Ratio NA NA NA 119,40
0%
IFRS Tier 1 Leverage Ratio 6,94 6,57 6,53 6,19 2015Y 2014Y 2013Y 2012Y
Tier 1 Common Capital Tier 1 Capital Tier 2 Capital
Core Tier 1 Ratio 16,48 14,53 13,61 14,72 T3: Other Tier 3 Adjustments T3: Tier 3 Subordinated Debt
Gross Impaired Loans/ Loans Total Capital
0,11 0,07 0,04 0,03 2.106 2.043 1.523 1.497
at Amortised Cost (€mm)
As at 12 May 2016 15:17 (CET); Source: Bloomberg (redemption profiles), SNL, NORD/LB Fixed Income Research
Challenges/strengths Risks/weaknesses
+ Cooperative Group and solid franchise structure – Regional concentration on Québec
+ Very good credit quality – High level of debt among Canadian households
+ Exceptional market position in Québec – Macroeconomic consequences of the fall in oil prices
NORD/LB Fixed Income Research Page 10 of 25Financial Special 18 May 2016
Analysts: Michaela Hessmert/Melanie Kiene
Canada Canadian Imperial Bank of Commerce
Issuer ratings The Canadian Imperial Bank of Commerce (CIBC) is one the five largest financial insti-
LT tutions in Canada and is assessed as being a national systemically important bank by
Outlook
the Canadian financial supervisory authority, the OSFI. CIBC serves approximately 11
Fitch AA- Stable
million (primarily Canadian) customers (over 80% of net earnings are attributable to
Moody’s Aa3 Negative Canadian operations) and employs 44,000 staff. The business activities of CIBC are
S&P A+ Stable subdivided into three main areas: “Retail and Business Banking” (RBB), “Wealth Man-
As at 12 May 2016 agement” (WM) and “Capital Markets” (CM) in addition to the “Corporate and Other”
Source: Bloomberg segment (back office areas and also international participations). RBB is by far the
most important segment for CIBC, contributing 66% of net profit on average. As with
Key facts many other banks around the world, CIBC is currently undergoing a transformation
Homepage: process with the aim of accelerating an increase in earnings, reducing structural costs
www.cibc.com and improving efficiency. For 2016, CIBC has planned savings of CAD 100m and tar-
Bloomberg ticker: geted investments amounting to CAD 150m. With a cost-income ratio of 62.13%, CIBC
CM CN ranks in the midfield of the 15 largest banks in North America as at H2 2015 (reference
5Y-Mid-CDS in bp: date 31 October). The RBB credit portfolio is dominated by private mortgages (64% as
NA at Q1 2016) followed by corporate loans (18%). The CET 1 ratio (fully loaded) is solid
at 10.6% (Q1 2016; Q1 2015: 10.3%), while asset quality (NPL ratio: 0.5%; Q1 2015:
As at 12 May 2016
Source: Bloomberg, CIBC 0.58% ) remains strong, even if some moderate pressure is expected here (decline in
oil prices, private household debt).
Balance sheet summary Debt type summary
(EUR m) 2012Y 2013Y 2014Y 2015Y
8%
Net Loans to
Customers
187.006 173.913 183.392 194.696 59%
(€000)
Total Securities 50.425 50.754 42.156 51.919 18% Senior Debt – Covered Bonds 7.933.937
Other Senior Debt 2.013.721
Total Deposits 191.355 187.099 202.920 226.428 Subordinated Debt 2.359.930
Subsidiary Trust Preferred 1.088.573
Tier 1 Common GIC-backed Note 0
#WERT! 9.020 10.342 11.653 Total 13.396.160
Capital 15%
Total Assets 303.413 280.622 293.752 320.801
Total Risk-weighted
88.935 96.416 100.351 108.468
Assets
Income statement summary Debt maturity profile
(EUR m) 2012Y 2013Y 2014Y 2015Y 4.000.000
3.500.000
Net Interest Income 5.649 5.549 5.079 5.613
3.000.000
Trading Account
41 20 -120 -99 2.500.000
Income
(€000)
2.000.000
Net Trading Income 315 211 46 65
1.500.000
Other Expense 645 582 588 499
1.000.000
Impaired Loans 1.441 1.091 1.015 983 500.000
0
Pre-tax Profit 3.078 2.960 2.665 2.996 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026+
Company ratios Capital structure
In % 2012Y 2013Y 2014Y 2015Y 100%
Net Interest Margin 2,23 2,22 2,17 2,12 80%
60%
ROAE 19,97 19,66 17,09 17,83
40%
Cost-to-Income 57,80 58,36 64,58 62,12
20%
Liquidity Coverage Ratio NA NA NA 118,90
0%
IFRS Tier 1 Leverage Ratio NA NA NA NA 2015Y 2014Y 2013Y 2012Y
Tier 1 Common Capital Tier 1 Capital Tier 2 Capital
Core Tier 1 Ratio NA 9,40 10,30 10,80 T3: Other Tier 3 Adjustments T3: Tier 3 Subordinated Debt
Gross Impaired Loans/ Loans Total Capital
0,76 0,62 0,55 0,50 16.226 15.568 14.074 15.378
at Amortised Cost (€mm)
As at 12 May 2016 15:17 (CET); Source: Bloomberg (redemption profiles), SNL, NORD/LB Fixed Income Research
Challenges/strengths Risks/weaknesses
+ Good market position and capitalisation – High level of debt among Canadian households
+ Very good credit quality – Macroeconomic consequences of the fall in oil prices
NORD/LB Fixed Income Research Page 11 of 25Financial Special 18 May 2016
Analysts: Michaela Hessmert/Melanie Kiene
Canada National Bank of Canada
Issuer ratings The National Bank of Canada (NBC; National Bank) has been formed on the back of a
LT number of mergers and ranks among the national systemically important banks. NBC
Outlook
employs nearly 20,000 staff and serves ~2.4 million customers across 452 branches
Fitch A+ Stable
(reference date: 31 Oct. 2015). Its geographic focus is clearly directed toward the prov-
Moody’s Aa3 Negative ince of Québec (63% of private mortgages and HELOC portfolio as at Q1 2016), where
S&P A Stable the bank is well-positioned in many areas of the private and corporate banking market.
As at 12 May 2016 NBC’s business operations can be categorised in four segments: “Personal and Com-
Source: Bloomberg mercial Banking” (PCB), “Wealth Management” (WM), “Financial Markets” (FM) and
“Other” (which includes Treasury, among others). PCB and FM each contributed
Key facts around 40% to overall net income (excluding “Other”, according to NBC data) as at Q1
Homepage: 2016. On account of the rapidly changing banking market, NBC currently also finds
www.nbc.ca itself in the midst of restructuring processes, with the aim of generating sustainable
Bloomberg ticker: growth. The four key points of this strategy are streamlining processes, growth in Qué-
NA CN bec and Canada (esp. expansion in niche markets), international growth (expansion
5Y-Mid-CDS in bp: into emerging economies) and intensification of white label operations to conquer new
NA markets (primarily outside of Québec). As at Q1 2016, the CET1 ratio (fully loaded) was
9.7% (Q1 2015: 9.3%), while the leverage ratio was 3.8% (Q1 2015: 3.6%) and the
As of 12 May 2016
Source: Bloomberg, NBS NPL ratio remained unchanged from last year at the low level of 0.39%.
Balance sheet summary Debt type summary
(EUR m) 2012Y 2013Y 2014Y 2015Y
8%
Net Loans to
Customers
63.807 62.317 68.848 73.284 62%
Total Securities 42.371 37.893 37.491 38.803 18% (€000)
Senior Debt – Covered Bonds 5.405.150
Other Senior Debt 1.033.498
Total Deposits 72.144 71.995 84.877 89.204 Subordinated Debt 1.561.071
Subsidiary Trust Preferred 663.349
Tier 1 Common GIC-backed Note 0
3.147 3.772 4.237 4.709
Capital Total 8.663.068
12%
Total Assets 137.307 132.708 145.444 149.624
Total Risk-weighted
43.120 43.186 46.345 47.995
Assets
Income statement summary Debt maturity profile
(EUR m) 2012Y 2013Y 2014Y 2015Y 3.000.000
Net Interest Income 1.794 1.815 1.759 1.902 2.500.000
Trading Account 2.000.000
68 138 72 148
Income
(€000)
1.500.000
Net Trading Income 227 267 203 243
1.000.000
Other Expense 241 249 265 278
Reserves for Impaired 500.000
161 149 169 141
Customer Loans
0
Pre-tax Profit 1.476 1.313 1.248 1.314 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026+
Company ratios Capital structure
In % 2012Y 2013Y 2014Y 2015Y 100%
Net Interest Margin 1,57 1,56 1,54 1,55 80%
60%
ROAE 20,65 17,25 15,93 15,10
40%
Cost-to-Income 64,23 63,11 62,71 63,06
20%
Liquidity Coverage Ratio NA NA NA 131,00
0%
IFRS Tier 1 Leverage Ratio NA NA NA NA 2015Y 2014Y 2013Y 2012Y
Tier 1 Common Capital Tier 1 Capital Tier 2 Capital
Core Tier 1 Ratio 7,34 8,73 9,23 9,90 T3: Other Tier 3 Adjustments T3: Tier 3 Subordinated Debt
Gross Impaired Loans/ Loans Total Capital
0,46 0,44 0,50 0,43 6.701 6.987 6.477 6.837
at Amortised Cost (€mm)
As at 12 May 2016 15:17 (CET); Source: Bloomberg (redemption profiles), SNL, NORD/LB Fixed Income Research
Challenges/strengths Risks/weaknesses
+ Strong market position in Québec – Concentration risks: Québec
+ Very good credit quality – Major importance of volatile capital market business
+ Diversification strategy – Private household debt, falling oil prices
NORD/LB Fixed Income Research Page 12 of 25Financial Special 18 May 2016
Analysts: Michaela Hessmert/Melanie Kiene
Canada Royal Bank of Canada
Issuer ratings Headquartered in Toronto, Royal Bank of Canada (RBC) is the largest Canadian bank
LT (and sixth largest in North America) by assets as at Q1 2016. RBC (approximately
Outlook
80,000 employees) offers over 16 million customers a broad spectrum of financial
Fitch AA Negative
products and services as a universal bank. Reporting is divided between the segments
Moody’s Aa3 Negative “Personal & Commercial Banking” (PCB), “Capital Markets” (CM), “Wealth Manage-
S&P AA- Stable ment” (WM), “Insurance”, “Investor & Treasury Services” and “Corporate Support”. PCB
As at 12 May 2016 represents the most important pillar of RBC’s operations (52% of net profit as at Q1
Source: Bloomberg 2016), followed by CM (24%) and WM (11%). In geographical terms, North America
(Canada: 62%; USA: 20%) is the most important market, while less than one fifth of
Key facts profit is generated from international operations. RBC is the market leader in many
Homepage: areas of the Canadian PCB market, for example in consumer loans (including mort-
www.rbc.com gages) with nearly 24% market share. In Q4 2015, RBC completed the acquisition of
Bloomberg ticker: City National Corporation (headquarters in Los Angeles, CA, USA), thereby increasing
RY CN the bank’s U.S. Presence, particularly in the field of wealthy private customers. At a
5Y-Mid-CDS in bp: value of USD 5.33bn, the transaction was the largest M&A deal in the U.S. banking
NA market between January 2015 and March 2016. Despite the fall in oil prices, the credit
quality is sound (NPL ratio as at Q1 2016: 0.60%) within the framework of Canada’s
As at 12 May 2016
Source: Bloomberg, RBC comparatively positive economic situation, while the CET1 ratio (9.9%) meets the re-
quirements of Canadian regulations (national systemically important bank).
Balance sheet summary Debt type summary
(EUR m) 2012Y 2013Y 2014Y 2015Y
11%
Net Loans to
291.930 288.268 308.142 326.974 47%
Customers
(€000)
Total Securities 124.726 128.823 140.997 149.221 Senior Debt – Covered Bonds 28.831.025
Other Senior Debt 25.866.492
Total Deposits 395.354 397.010 434.783 482.769 Subordinated Debt 6.647.598
Subsidiary Trust Preferred 340.179
Tier 1 Common GIC-backed Note 0
22.675 21.534 25.775 30.269 Total 61.685.294
Capital
Total Assets 635.935 606.181 665.910 743.796
42%
Total Risk-weighted
216.576 224.904 263.412 286.629
Assets
Income statement summary Debt maturity profile
(EUR m) 2012Y 2013Y 2014Y 2015Y 14.000.000
12.000.000
Net Interest Income 9.592 9.865 9.611 10.476
10.000.000
Trading Account
1.006 646 505 391
Income 8.000.000
(€000)
Net Trading Income 1.572 1.342 1.199 1.072 6.000.000
Other Expense 4.184 3.365 3.781 3.458 4.000.000
Reserves for Impaired 2.000.000
492 422 447 453
Customer Loans
0
Pre-tax Profit 7.392 7.779 7.973 8.952 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026+
Company ratios Capital structure
In % 2012Y 2013Y 2014Y 2015Y 100%
Net Interest Margin 1,96 1,88 1,85 1,70 80%
60%
ROAE 17,61 17,77 17,31 17,10
40%
Cost-to-Income 62,65 61,78 61,84 60,81
20%
Liquidity Coverage Ratio NA NA NA 127,00
0%
IFRS Tier 1 Leverage Ratio NA NA NA NA 2015Y 2014Y 2013Y 2012Y
Tier 1 Common Capital Tier 1 Capital Tier 2 Capital
Core Tier 1 Ratio 10,50 9,60 9,90 10,60 T3: Other Tier 3 Adjustments T3: Tier 3 Subordinated Debt
Gross Impaired Loans/ Loans Total Capital
0,59 0,54 0,45 0,48 40.163 35.414 31.528 32.684
at Amortised Cost (€mm)
As at 12 May 2016 15:17 (CET); Source: Bloomberg (redemption profiles), SNL, NORD/LB Fixed Income Research
Challenges/strengths Risks/weaknesses
+ Strong market position in North America – Private household debt, falling oil prices
+ Very good credit quality – High proportion of volatile capital market income
NORD/LB Fixed Income Research Page 13 of 25Financial Special 18 May 2016
Analysts: Michaela Hessmert/Melanie Kiene
Canada Toronto-Dominion Bank
Issuer ratings The Toronto-Dominion Bank (TD) is headquartered in Toronto. As at Q1 2016, it is
LT Outlook Canada’s second-largest bank by assets and ranks among the country’s national sys-
temically important banks. TD employs nearly 80,000 staff (more than 24 million cus-
Fitch AA- Stable
tomers) of which the majority are based in North America (Canada: 38,000; USA: ap-
Moody’s Aa1 Negative proximately 25,000). The North American focus is reflected in the high proportions of
S&P AA- Stable the segments “Canadian Retail” (64%; brand name: TD Canada Trust) and “U.S. Re-
As at 12 May 2016 tail” (27%; brand name: TD Bank; includes a 41.68% participation in TD Ameritrade) in
Source: Bloomberg the adjusted net income for Q1 2016. The remaining 9% is attributable to the third main
segment of “Wholesale Banking” (investment banking as well as capital market prod-
Key facts ucts and services). Both retail segments include private and corporate banking, wealth
Homepage: management, vehicle financing in addition to insurance and credit card portfolios in
www.td.com Canada. TD can boast significant market shares and therefore high market power for
Bloomberg ticker: many financial service products of its private and corporate banking business. As at Q1
TD CN 2016, TD’s CET1 ratio (fully loaded) amounted to 9.9% and is therefore on a par with
5Y-Mid-CDS in bp: the similarly large RBC. An NPL ratio of 0.65% (Q1 2015: 0.57%) reflects the high cred-
79 it quality. Should oil prices continue to remain low, slight pressure on asset quality is to
be expected in connection with the high level of debt of private Canadian households.
As at 12 May 2016
Source: Bloomberg, TD
Balance sheet summary Debt type summary
(EUR m) 2012Y 2013Y 2014Y 2015Y 3%
12%
Net Loans to
321.936 320.906 346.252 384.283
Customers
37% (€000)
Total Securities 147.422 150.215 156.698 179.197 Senior Debt – Covered Bonds 19.449.009
Other Senior Debt 24.995.398
Total Deposits 376.453 381.870 425.307 481.626 Subordinated Debt 6.068.792
Subsidiary Trust Preferred 1.870.984
Tier 1 Common GIC-backed Note 0
#WERT! 18.206 21.923 26.283 Total 52.384.182
Capital
Total Assets 625.978 607.786 680.042 764.683
Total Risk-weighted 48%
189.768 201.900 234.052 265.962
Assets
Income statement summary €-Senior Unsec. Bonds vs. iBoxx € Fin. Senior
(EUR m) 2012Y 2013Y 2014Y 2015Y 280
Net Interest Income 11.587 11.968 11.973 13.279 230
ASW in bp
Trading Account 180
-32 -208 -238 -158
Income
130
Net Trading Income 400 184 48 88
80
Other Expense 3.139 3.922 4.162 4.326
30
Reserves for Impaired
323 317 345 404 -20
Customer Loans
0 2 4 6 8 10 12 14
Maturity years
Pre-tax Profit 5.638 5.587 6.179 6.503
iBoxx € Financial Senior TORONTO DOM BANK
Company ratios Capital structure
In % 2012Y 2013Y 2014Y 2015Y 100%
Net Interest Margin 2,28 2,24 2,23 2,09 80%
60%
ROAE 14,03 13,36 14,58 12,75
40%
Cost-to-Income 62,17 65,00 63,78 63,11
20%
Liquidity Coverage Ratio NA NA NA 126,00
0%
IFRS Tier 1 Leverage Ratio NA NA NA NA 2015Y 2014Y 2013Y 2012Y
Tier 1 Common Capital Tier 1 Capital Tier 2 Capital
Core Tier 1 Ratio NA 9,00 9,40 9,90 T3: Other Tier 3 Adjustments T3: Tier 3 Subordinated Debt
Gross Impaired Loans/ Loans Total Capital
0,61 0,60 0,57 0,59 37.113 31.333 28.689 29.788
at Amortised Cost (€mm)
As at 12 May 2016 15:17 (CET); Source: Bloomberg (redemption profiles), SNL, NORD/LB Fixed Income Research
Challenges/strengths Risks/weaknesses
+ Outstanding market position in Canada – High levels of debt among Canadian households
+ Very good credit quality – Macroeconomic consequences of the fall in oil prices
+ Stable and high profitability – Stronger competition on the U.S. market
NORD/LB Fixed Income Research Page 14 of 25Financial Special 18 May 2016
Covered bonds The Canadian covered bond market – an overview
Analyst: With an issuance volume of EUR 7.75bn ytd (EUR-denominated benchmark
Kai Ebeling bonds) Canadian covered bond issuers currently constitute the third-largest
group of issuers behind France (EUR 14.75bn) and Germany (EUR 12.5bn).
Canada is the jurisdiction with the highest issuance volume of EUR-
Canadian issuers constitute denominated benchmarks outside the Eurozone. Despite the fact that its
the third largest group of covered bond legislation is relatively recent, Canadian covered bonds are
issuers now a permanent fixture in the market. We start this article by providing an
overview of Canadian covered bond legislation before looking at the respec-
tive programmes briefly and finally examining developments on the primary
and secondary market in more depth.
A legal framework has been From 2007 up to and including 2012, Canadian issuers issued covered
in place since 2012 bonds on the basis of a contractual framework. As a result of the amend-
ment of the National Housing Act (NHA) in June 2012, the Canada Mortgage
and Housing Corporation (CMHC) was asked to implement a legal frame-
work. CMHC implemented this request in December 2012 and simultane-
ously published the Canadian Registered Covered Bond Programmes Guide
(CMHC Guide), which defines the legal requirements for the respective issu-
ers and their programmes in detail. The NHA and the CMHC Guide have
provided the legal basis for Canadian covered bonds since then, meaning
that issues since 2013 come under the newly implemented law, whereas
covered bonds which were issued on a contractual basis and whose cover
pools contain loans guaranteed by the CMHC do not come under the Cana-
dian covered bond legislation and are assigned to a separate programme for
this reason.
Requirements for cover According to the requirements of the covered bond legislation, only first-
assets ranking mortgage loans used for residential purposes from Canada, which
are not insured against default by the debtor, are permitted as cover assets.
Furthermore, the properties financed may not contain more than four resi-
dential units and can have a maximum loan-to-value (LTV) of 80%. On top of
that, the loans that are being used as collateral must not be in default, at
least one interest or principal payment must have been made and the loan
agreements must not be the subject of any legal disputes or similar. In addi-
tion to the collateral defined above, the cover pool may also contain up to
10% substitute cover assets or cash.
Requirements for issuers Banks, trust companies, insurance companies or credit unions are among
the entities able to register as covered bond issuers in Canada. To register,
potential issuers must satisfy certain minimum requirements (according to
the CMHC Guide), whereupon, among other things, both the issuer and its
covered bond programme must have at least two ratings. Seven issuers are
currently authorised to use covered bonds for refinancing purposes in Cana-
da. However, to avoid asset encumbrance, the volume of outstanding bond
issues may not exceed four percent of total assets.
NORD/LB Fixed Income Research Page 15 of 25Financial Special 18 May 2016
A total of seven covered The authorised issuers are Bank of Montreal (BMO), Bank of Nova Scotia
bond issuers are currently (BNS), La Caisse Centrale Desjardins (CCD), Canadian Imperial Bank of
registered in Canada Commerce (CIBC), National Bank of Canada (NBC), Royal Bank of Canada
(RBC) as well as Toronto Dominion Bank (TD), which all issue EUR-
denominated benchmark bonds as well. The following table lists various
distinguishing features of the associated covered bond programmes as well
as the issuer ratings. It is striking that all covered bond programmes have a
rating of AAA or Aaa and the collateral score, which is used by Moody’s to
estimate loan quality, is at a very good level, moving in a narrow range be-
tween 5.0% and 5.8%.
Banca PopolareofEmilia
A comparison Canadian covered bond issuers (March 2016)
Banca Popolare Emilia 1 1
Characteristics BMO BNS CCD CIBC NBC RBC TD
Issuer long term Rating Aa3 / AA- / Aa3 / AA- / Aa2 / AA- / Aa3 / AA- / Aa3 / A+ / Aa3 / AA / - / Aa1 / - / - /
(M//F/S&P/DBRS) - / AA A+ / AA A+ / AA A+ / AA A / AA (low) AA AA
Covered Bond Rating Aaa / AAA / Aaa / AAA / Aaa / AAA / Aaa / AAA / Aaa / AAA / Aaa / AAA / Aaa / - / - /
(M/F//S&P/DBRS) - / AAA - / AAA -/- -/- - / AAA - / AAA AAA
CB Programme Size USD 15bn USD 25bn EUR 5bn CAD 20bn USD 7bn EUR 32 bn CAD 40bn
Outstanding volume CAD 10.3bn CAD 16.4bn CAD 4.4bn CAD 9.6 bn CAD 5.3bn CAD 38.0bn CAD 17.3bn
Cover pool CAD 9.8bn CAD 49.5bn CAD 29.0bn
CAD 15.2bn CAD 20.4bn CAD 5.9bn CAD 17.7bn
volume
OC 47.6% 24.4% 34.1% 84.4% 84.9% 30.3% 67.6%
Outstanding volume
under former Covered CAD 2.0bn CAD 6.4bn CAD 1.5bn CAD 1.4bn CAD 2.0bn - CAD 5.9bn
Bond Programmes
OSFI Maximum CAD 27.2bn CAD 36.9bn CAD 7.4bn CAD 19.1bn CAD 8.5bn CAD 44.7bn CAD 45.1bn
Free Issuance capacity CAD 14.9bn CAD 14.1bn CAD 1.5bn CAD 8.1bn CAD 1.2bn CAD 6.7bn CAD 21,9bn
Collateral Score 5.5%2 5.8%3 n/a 5.3%2 5,0%4 5.4%2 5,0%2
CRR risk weighting 20% 20% 20% 20% 50% 20% 20%
LCR level 2a 2a 2a 2a 2a 2a 2a
(benchmark)
Source: Issuers, Moody’s, NORD/LB Fixed Income Research
1
February 2016, 2 January 2016, 3 October 2015, 4 December 2015
Banca Popolare Emilia
NORD/LB Fixed Income Research Page 16 of 25Financial Special 18 May 2016
Limit on covered bond The Canadian financial supervisory authority – Office of the Superintendent
volume is currently not a of Financial Institutions (OSFI) – limits the issue of covered bonds to a max-
hindrance imum of four percent of the respective deposit-taking financial institution’s
total assets at the time of the issue. This is identified and shown in the cover
pool reports as “OSFI covered bond limit”. If the limit is breached, the issuer
must inform the OSFI without delay. If the excess is the result of a circum-
stance over which the issuer has no influence (such as an adverse move-
ment in exchange rates), no additional measures are required to reduce the
outstanding volume. Following the introduction of the leverage ratio, the
OSFI has adjusted the calculation of the OSFI covered bond limit, meaning
that since 2015, certain data fields in the leverage requirements return (LRR)
and Basel capital adequacy return (BCAR) templates have been used. In
their most recent cover pool reports, the seven Canadian issuers currently
have sufficient leeway for additional EUR-denominated benchmark issues.
On top of that, for instance, the last two outstanding issues issued by the
National Bank of Canada under the earlier structured covered bond pro-
gramme will mature in October this year, which will increase capacity for new
issues by ca. CAD 2.0bn. It should therefore be noted that the limit on cov-
ered bond issues does not restrict the activities of individual issuers at the
present time.
Risk weighting according Since the Canadian banks listed above are not domiciled in the EEA, their
to CRR outstanding covered bonds are neither UCITS 52 (4)- nor CRR-compliant,
meaning that investors can only use the standard approach for the risk
weighting. Accordingly, Canadian covered bond issues are to be treated as
unsecured bonds, which results in the risk weighting amounting – with one
exception based on the rating – to 20%. Any covered bond issues held from
the National Bank of Canada must even be backed with 50% equity because
of the rating by Fitch and Standard & Poor’s.
ECB eligibility and LCR If Canadian covered bonds were issued in EUR, GBP, JPY or USD, these
classification are eligible for repo transactions with the European Central Bank. Depend-
ing on the rating and characteristics of the respective covered bond, various
haircuts are applied. Furthermore, benchmark issues from the issuers listed
above which were issued under the legal framework must be classified as
level 2a assets in accordance with the provisions of the liquidity coverage
ratio if their reports continue to satisfy the requirements under CRR 129 (7).
Development of primary The following chart shows the development of the primary market volume of
market volume EUR-denominated benchmark covered bonds since the introduction of the
covered bond legislation in December 2012. The first issue under the new
legislation was issued by Royal Bank of Canada in July 2013. The other six
issuers (so far) then followed within a year.
NORD/LB Fixed Income Research Page 17 of 25Financial Special 18 May 2016
Primary market volume (EUR bmk) - development Issuance volume by issuer (EUR bmk)
16 14 4.5
12
4
14 12
11
3.5
12
10
3
10
in EURbn
in EURbn
8 2.5
number
6
8
14.25 2
6
6 4 12.5
1.5
4
4 7.75 1
5.5
2 2
0.5
0 0 0
2013 2014 2015 2016 ytd BMO BNS CCDJ CM NACN RY TD
Issuance volume Benchmarks 2013 2014 2015 2016 ytd
Source: Market data, NORD/LB Fixed Income Research Source: Market data, NORD/LB Fixed Income Research
Continuous increase in Since 2013, both the number of EUR-denominated benchmarks and the
primary market volume issuance volume has grown continuously to reach EUR 40.0bn at present,
with six issues totalling EUR 7.75bn having been issued to date in the cur-
rent financial year. Average issuance volume in the individual calendar years
was between EUR 1.2bn (2014/15) and EUR 1.4bn (2013). Bank of Montreal
featured as the largest issuer in the jurisdiction (in terms of issuance volume)
both this year and last. We may therefore have to amend our forecast for the
Canadian covered bond market which was prepared at the end of 2015, of
EUR 10.0bn (at the end of 2016), during the year.
Benchmark issues by maturity Maturities by issuer
100%
10% 8
90%
28%
36% 7
80% 39%
70% 6
52%
60% 5
50%
4
40% 62%
53% 3
30% 64%
20% 39% 2
10% 1
10% 9%
0%
2013 2014 2015 2016 0
year
2013 2014 2015 2016 ytd
BMO BNS CCDJ CM NACN RY TD
1Y-3Y 3Y-5Y 5Y-7Y
Source: Market data, NORD/LB Fixed Income Research Source: Market data, NORD/LB Fixed Income Research
Issues are concentrated on A breakdown of issues by maturity band makes clear that the majority of
maturities between three and new issues were issued in the 3Y-5Y maturity segment. While short-dated
five years maturities were only in single-digit percentages in previous years, this year’s
issuance volume already exceeds the previous year’s figure, meaning that
currently approximately 39% were issued in this segment. By and large, it is
striking that maturities of more than seven years have not been chosen by
issuers so far.
NORD/LB Fixed Income Research Page 18 of 25Financial Special 18 May 2016
Seven years represent the An examination of maturities according to the respective issuer shows that
maximum to date the National Bank of Canada is currently the only issuer of a covered bond
with a maturity of seven years. The most frequently chosen maturity, with 19
issues in total and an issuance volume of EUR 22.75bn (since 2013), is five
years.
Investors by country of origin Distribution by investor
60%
45%
40% 50%
35%
40%
30%
25% 30%
20%
20%
15%
10% 10%
5%
0%
0%
Insurances
Central Banks/SSA
Retail/Private Wealt
Asset Managers
Other
Corporates
Hedge Funds
Banks
Funds
Pensions
2013 2014 2015 2016
2013 2014 2015 2016
Source: Market data, NORD/LB Fixed Income Research Source: Market data, NORD/LB Fixed Income Research
German investors are the For Canadian issuers, German and Austrian investors are still the most im-
most important group of portant group of purchasers for EUR-denominated benchmark issuers, hav-
investors ing accounted for a share of ca. 36.3% on average since 2013. They are
lagged behind by some distance by investors from the UK and Ireland
(12.6% in 2016) and the Benelux states (2016: 11.0%). Investors from the
Nordics and Asia / Middle East accounted for an average share of issuance
volume of ca. 10% in the current year. A further breakdown of investors re-
veals that commercial banks take the largest share of an issue, around 43%
on average, although their share has fallen continuously in recent years.
This is offset by the allocation rate to central banks, which has risen from
18.8% since 2013 to the current figure of 29.8%.
Current spread level – Canada Spread trend (five years generic)
16 80
70
14
60
12 50
40
ASW in bp
10
ASW in bp
30
8 20
6 10
0
4
-10
2 -20
Mai 15 Jun 15 Jul 15 Aug 15 Sep 15 Okt 15 Nov 15 Dez 15 Jan 16 Feb 16 Mrz 16 Apr 16
0
0 1 2 3 4 5 6 7 8 9 10
maturity in years Core Eurozone Periphery Eurozone Periphery Multi
BMO BNS CCDJ CM NACN RY TD CA Other Europe Overseas CA
Source: Bloomberg, NORD/LB Fixed Income Research Source: Bloomberg, NORD/LB Fixed Income Research
NORD/LB Fixed Income Research Page 19 of 25Financial Special 18 May 2016
Secondary market – currently When looking at the current spread level (EUR-denominated benchmark
very low spread level bonds, which were represented in the iBoxx EUR Covered in April), it is strik-
ing that the outstanding issues of the seven benchmark issuers fall within a
narrow range in the respective maturity segment, whereby the curve trend
overall is relatively steep. We believe that the narrow spread of the various
issues is attributable to the high rating density of the individual covered bond
programmes and the lack of rating volatility. The spread trend (five years
maturity) in the last twelve months in comparison with the five covered bond
regions shows that Canadian covered bonds were slightly above the spread
level of covered bonds from Other Europe, although they even fell below this
spread level in recent months, meaning that they are currently at a very low
level from a historical perspective.
Conclusion Despite their relatively brief history, the development of Canadian covered
bonds may be viewed as a success story overall. The continuous (to date)
growth in issuance volume at a very narrow spread level illustrates not only
that the covered bond is a permanent part of Canadian issuers’ funding mix
but also that EUR-denominated benchmarks from Canada are very popular
at the same time, particularly with German and Austrian investors. Even the
regulatory disadvantage with the risk weighting and LCR classification in
comparison with issuers from the EAA does not seem to tempt investors to
prefer issuers from other regions at present.
NORD/LB Fixed Income Research Page 20 of 25Financial Special 18 May 2016
Appendix Contacts
Fixed Income Research
Michael Schulz Head +49 511 361-5309 michael.schulz@nordlb.de
Kai Niklas Ebeling Covered Bonds +49 511 361-9713 kai.niklas.ebeling@nordlb.de
Mario Gruppe Public Issuers +49 511 361-9787 mario.gruppe@nordlb.de
Michaela Hessmert Banks +49 511 361-6915 michaela.hessmert@nordlb.de
Christopher Kief Corporates / Retail Products +49 511 361-4710 christopher.kief@nordlb.de
Melanie Kiene Banks +49 511 361-4108 melanie.kiene@nordlb.de
Jörg Kuypers Corporates / Retail Products +49 511 361-9552 joerg.kuypers@nordlb.de
Matthias Melms Covered Bonds +49 511 361-5427 matthias.melms@nordlb.de
Sascha Remus Corporates / Retail Products +49 511 361-2722 sascha.remus@nordlb.de
Norman Rudschuck Public Issuers +49 511 361-6627 norman.rudschuck@nordlb.de
Martin Strohmeier Corporates / Retail Products +49 511 361-4712 martin.strohmeier@nordlb.de
Kai Witt Corporates / Retail Products +49 511 361-4639 kai.witt@nordlb.de
Markets Sales
Carsten Demmler Head +49 511 361-5587 carsten.demmler@nordlb.de
Institutional Sales (+49 511 9818-9440)
Daniel Gutschka (Head) daniel.gutschka@nordlb.de Daniel Novotny-Farkas daniel.novotny-farkas@nordlb.de
Julia Bleser julia.bleser@nordlb.de Gabriele Schneider gabriele.schneider@nordlb.de
Thorsten Bock thorsten.bock@nordlb.de Dirk Scholden dirk.scholden@nordlb.de
Uwe Kollster uwe.kollster@nordlb.de Uwe Tacke uwe.tacke@nordlb.de
Sales Saving Banks / Regional Banks (+49 511 9818-9400)
Christian Schneider
christian.schneider@nordlb.de Stefan Krilcic stefan.krilcic@nordlb.de
(Head)
Oliver Bickel oliver.bickel@nordlb.de Martin Koch martin.koch@nordlb.de
Tobias Bohr tobias.bohr@nordlb.de Bernd Lehmann bernd.lehmann@nordlb.de
Kai-Ulrich Dörries kai-ulrich.doerries@nordlb.de Jörn Meißner joern.meissner@nordlb.de
Marc Ehle marc.ehle@nordlb.de Lutz Schimanski lutz.schimanski@nordlb.de
Sascha Goetz sascha.goetz@nordlb.de Brian Zander brian.zander@nordlb.de
Fixed Income / Structured Products Sales Europe (+352 452211-515)
René Rindert (Head) rene.rindert@nordlb.lu Patricia Lamas patricia.lamas@nordlb.lu
Morgan Kermel morgan.kermel@nordlb.lu Laurence Payet laurence.payet@nordlb.lu
Corporate Sales
Shipping / Aircraft +49 511 9818-8150 Corporate Clients +49 511 9818-4003
Real Estate / +49 511 9818-8150 +49 511 9818-4006
FX/MM
Structured Finance
Syndicate / DCM (+49 511 9818-6600)
Thomas Cohrs (Head) thomas.cohrs@nordlb.de Wlada Pesotska wlada.pesotska@nordlb.de
Axel Hinzmann axel.hinzmann@nordlb.de Andreas Raimchen andreas.raimchen@nordlb.de
Thomas Höfermann thomas.hoefermann@nordlb.de Udo A. Schacht udo.schacht@nordlb.de
Alexander Malitsky alexander.malitsky@nordlb.de Marco da Silva marco.da.silva@nordlb.de
Julien Marchand julien.marchand@nordlb.de Lutz Ulbrich lutz.ulbrich@nordlb.de
Financial Markets Trading
Corporates +49 511 9818-9690 Collat. Mgmt / Repos +49 511 9818-9200
Covereds / SSAs +49 511 9818-8040 Cust. Exec. & Trading +49 511 9818-9480
Financials +49 511 9818-9490 Frequent Issuers +49 511 9818-9640
Governments +49 511 9818-9660 Structured Products +49 511 9818-9670
Länder & Regions +49 511 9818-9550
NORD/LB Fixed Income Research Page 21 of 25You can also read
