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Fixed Income Research

Financial Special

18 May 2016

Banking Market

Canada

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Financial Special 18 May 2016

NORD/LB Fixed Income Research Page 2 of 25

Financials Canadian Banking Market

NORD/LB estimation

Financial market

CA-Senior Fin. vs. iBoxx € Senior Fin.

Positive 5y CDS vs. Germany

-100

-50

0

50

100

150

200

250

300

350

0 2 4 6 8 10 12 14

Asse

t S

wap

Sp

re

ad

Mid

in

BP

Maturity Years YTDiBoxx € SNR FIN CA

Country ratings

NA NA

LT Outlook

Government bond yield

vs. Bund

Fitch AAA STABLE

2y 0,698 1,196

Moody’s Aaa STABLE

5y 0,924 1,231

S&P AAA STABLE

10y 1,543 1,272

As at: 19.05.16; Source: Bloomberg

As at: 26 April 16 11:09 (CET); Source: Bloomberg

As at: 26 April 16 11:09 Time (CET); Source: Bloomberg, NORD/LB Fixed Income Research

Analyst:

Michaela Hessmert

Canada (ratings: Moody’s: Aaa; Fitch: AAA; S&P: AAA) is the second largest

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

0

0,5

1

1,5

2

2,5

3

3,5

4

2010 2011 2012 2013 2014 2015 2016

10Y CAN Govt 5Y CAN Govt 2Y CAN Govt

-5

-4

-3

-2

-1

0

1

2

3

4

5

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

%

GDP Canada Y/Y

As at: 20 April 2016 Source: Bloomberg, NORD/LB Fixed Income Research

As at: 20 April 2016 Source: Bloomberg, NORD/LB Fixed Income Research

Active member of the FSB

and BCBS

The Office of the Superintendent of Financial Institutions (OSFI), Canada’s

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.



Canadian banking superviso-

ry body OSFI

The Canadian banking supervisory authority was established in 1987. As an

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

D-SIB Bloomberg

Ticker Total Assets

CAD (m)

Rating (Moody's / Fitch /

S&P) Internet link

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-

portant banks (D-SIB)

The supervisory body identifies six Canadian financial institutes as national

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-tion buffer (%)

0.625 1.25 1.875 2.50 2.50 2.50

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

http://www.bmo.com/

http://www.scotiabank.com/

http://www.cibc.com/

http://www.nbc.ca/

http://www.rbc.com/

http://www.td.com/



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.



Capitalisation and

asset quality

Capitalisation of Canadian banks has slightly improved in recent years and is

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

NP

Ls

in

CA

D

(m)

2015 FY 1,959 4,658 1,419 457 2,285 3,244

2014 FY 2,048 4,200 1,434 486 1,977 2,731

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 ▼ ▲ ▼ ▲ ► ▲

NP

Ls

/ L

oa

ns

in %

2015 FY 0.60 0.97 0.50 0.43 0.48 0.58

2014 FY 0.70 0.95 0.55 0.50 0.45 0.56

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 ▼ ► ▼ ▼ ▼ ►

Reserv

es /

NP

Ls

in

% 2015 FY 92.96 90.10 117.69 124.51 88.80 105.86

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



CET 1 ratio ROAE

0,00

2,00

4,00

6,00

8,00

10,00

12,00

BMO BNS CIBC NBC RBC TD

%

2013Y 2014Y 2015Y

0,00

5,00

10,00

15,00

20,00

25,00


%

2013Y 2014Y 2015Y

As at: 20 April 2016 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

48,00

50,00

52,00

54,00

56,00

58,00

60,00

62,00

64,00

66,00


%

2013Y 2014Y 2015Y

0,00

0,50

1,00

1,50

2,00

2,50


%

2013Y 2014Y 2015Y





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.



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

is among the five largest banks in the country and the ten largest in North America as a

whole. BMO ranks among the six national systemically important banks (D-SIB) in

Canada. In geographical terms, the bank focuses on North America, particularly Cana-

da and the U.S. Midwest. Here, BMO offers a broadly diversified product portfolio,

ranging from retail banking and wealth management to investment banking and insur-

ance business. BMO’s 1,500 branches and nearly 47,000 employees serve more than

12 million customers worldwide. Outside North America, BMO operates in selected

European, Asian and Middle Eastern markets. The bank’s activities are divided into

four segments: “Canadian/U.S. Personal and Commercial Banking” (P&C), “Wealth

Management”, “BMO Capital Markets” and “Corporate Services”. The Canadian P&C

business alone contributed 42% to the total adjusted net income as at Q1 2016 (31

January) and recorded impressive growth in both lending business (+5% yoy) and de-

posits (+6% yoy). The credit quality is very good (NPL ratio: 0.62%). Capitalisation is

also solid, with a CET1 ratio of 10.1% for Q1 2016 (Q4 2015: 10.7%). In this regard, the

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-

pleted in December 2015. In contrast, the U.S. Business loan portfolio was strength-

ened (+23% yoy), while its exposure was further diversified.

LT Outlook

Fitch AA- Stable

Moody’s Aa3 Negative

S&P A+ Stable

As at 12 May 2016 Source: Bloomberg

Key facts

Homepage:

www.bmo.com

Bloomberg ticker:

BMO CN

5Y-Mid-CDS in bp:

NA

As at 12 May 2016 Source: Bloomberg, BMO

Balance sheet summary Debt type summary

(EURm) 2012Y 2013Y 2014Y 2015Y

32%

51%

16%1%

(€000)

Senior Debt – Covered Bonds 7.295.256

Other Senior Debt 11.618.548

Subordinated Debt 3.707.950

Subsidiary Trust Preferred 351.640

GIC-backed Note 0

Total 22.973.394

Net Loans to Customers

189.755 190.962 206.869 223.477

Total Securities 99.904 95.749 101.470 90.649

Total Deposits 251.019 259.726 278.307 303.394

Tier 1 Common Capital

16.698 14.967 15.874 17.745

Total Assets 404.956 378.654 416.771 444.447

Total Risk-weighted Assets

158.398 151.656 157.835 165.983

Income statement summary Debt maturity profile

(EUR m) 2012Y 2013Y 2014Y 2015Y

0

1.000.000

2.000.000

3.000.000

4.000.000

5.000.000

6.000.000

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026+

(€0

00

)

Net Interest Income 6.892 6.461 5.646 6.215

Trading Account Income

790 632 646 700

Net Trading Income 1.026 972 878 943

Other Expense 1.046 1.558 2.029 2.035

Reserves for Impaired Customer Loans

367 342 300 271

Pre-tax Profit 3.879 3.909 3.565 3.788

Company ratios Capital structure

In % 2012Y 2013Y 2014Y 2015Y

0%

20%

40%

60%

80%

100%

2015Y 2014Y 2013Y 2012YTier 1 Common Capital Tier 1 Capital Tier 2 Capital

T3: Other Tier 3 Adjustments T3: Tier 3 Subordinated Debt

Net Interest Margin 2,00 1,86 1,66 1,60

ROAE 14,38 13,73 13,01 11,75

Cost-to-Income 60,02 63,34 68,08 68,26

Liquidity Coverage Ratio NA NA NA 130,00

IFRS Tier 1 Leverage Ratio NA NA NA NA

Core Tier 1 Ratio 10,54 9,90 10,10 10,70

Gross Impaired Loans/ Loans at Amortised Cost NA NA NA NA Total Capital

(€mm) 23.946 22.604 20.800 23.671

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

+ Geographic diversification U.S. expansion

– Private household debt; falling oil prices

– High proportion of volatile capital market income

http://www.bmo.com/main/personal




Canada Bank of Nova Scotia

Issuer ratings The Bank of Nova Scotia (BNS; brand name: Scotiabank) belongs to the “Big Five” of

the Canadian banking market and is regarded as a national systemically important

bank. The bank’s activities are broadly diversified with branches in more than 50 coun-

tries, with Canada assuming the lead role (more than 1,100 of the nearly 3,200 branch-

es). BNS’s lines of business are divided between “Canadian Banking” (~50% of net

profit), “International Banking” (~30%) and “Global Banking” (~20%). Maintaining a

presence in Latin America, the Caribbean and Central America, BNS’s “International

Banking” segment is of greater importance than its Canadian counterparts. Services

offered to BNS’s 23 million customers include private and corporate banking, invest-

ment banking and capital market operations in addition to wealth management and

private banking. Nearly half of BNS’s credit portfolio is composed of private mortgages.

In an attempt to increase profitability, BNS increasingly relies on external growth in

more dynamic markets and more high-yield operations. In this way, acquisitions were

concluded for the financial services business of the Chile-based Cencosud SA (51%; in

May 2015), the Canadian credit card portfolio of JPMorgan Chase (in Nov. 2015) and

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

10.1% (Q1 2015: 10.3%) and the leverage ratio amounted to 4.0% (Q1 2015: 4.1%).

LT Outlook

Fitch AA- Stable


S&P A+ Stable


Key facts

Homepage:

www.scotiabank.com

Bloomberg ticker:

BNS CN

5Y-Mid-CDS in bp:

NA

As at 12 May 2016 Source: Bloomberg, NBS


(EUR m) 2012Y 2013Y 2014Y 2015Y

39%

46%

13% 2%

(€000)





GIC-backed Note 0

Total 50.349.223


282.046 291.504 310.683 330.260


Total Deposits 359.544 365.270 392.574 417.113

Tier 1 Common Capital #WERT! 18.585 23.889 25.595

Total Assets 515.742 524.321 570.412 593.050


195.506 203.234 222.630 248.890


(EUR m) 2012Y 2013Y 2014Y 2015Y

0

2.000.000

4.000.000

6.000.000

8.000.000

10.000.000

12.000.000

14.000.000

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026+

(€0

00

)


Trading Account Income 822 821 617 698

Net Trading Income 1.426 1.548 1.549 1.642

Other Expense 1.093 1.166 1.452 1.501

Reserves for Impaired Customer Loans 1.248 1.335 1.556 1.782

Pre-tax Profit 6.137 6.215 6.332 6.430


In % 2012Y 2013Y 2014Y 2015Y

0%

20%

40%

60%

80%

100%




ROAE 18,13 15,50 15,30 13,99

Cost-to-Income 55,49 54,29 54,88 54,23



Core Tier 1 Ratio NA 9,10 10,80 10,30

Gross Impaired Loans/ Loans at Amortised Cost 1,02 0,91 0,98 1,01 Total Capital

(€mm) 33.395 30.863 27.386 32.565



+ Diversified earnings profile

+ Good credit quality

+ Strong market position in Canada

– Private household debt; falling oil prices

– Dependence on capital market funding

– Increased risk appetite

http://www.scotiabank.com/




Canada Caisse centrale Desjardins du Québec

Issuer ratings Caisse centrale Desjardins (CCD) is part of the cooperative Desjardins Group and

assumes the role of financing company. In addition to the Fédération des caisses

Desjardins du Québec (FCDQ), which holds 95% of the shares in Caisse centrale

Desjardins, the insurance business centred the Western Financial Group is also part of

the Group. Caisse centrale Desjardins operates in the areas of business: “Business

and Institutional Services” (financial services and products for medium and large enter-

prises, public bodies and administrations), “Desjardins Group Treasury” (funding for the

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

subsidiary of the Desjardins Group, Caisse centrale Desjardins must always be viewed

in the context of the cooperative financial group as a whole. This structure includes

around 800 business and service centres, primarily in Québec and Ontario, serving

more than 7 million customers and members. In Québec, Caisse centrale Desjardins

achieves exceptionally high market shares in the areas of private savings (43% as at

December 2015), private mortgage financing (36%) and agricultural loans (40%). Capi-

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:

7.8%) is above average.

LT Outlook

Fitch AA- Stable


S&P A+ Stable


Key facts

Homepage:

www.desjardins.com

Bloomberg ticker:

2733413Z CN

5Y-Mid-CDS in bp:

NA

As at 12 May 2016 Source: Bloomberg, CCD


(EUR m) 2012Y 2013Y 2014Y 2015Y 36%

58%

6%

(€000)

Secured

Unsecured

Subordinated Debt

Other Debt

Government & Bank GTD

Total 15.628.145

5.630.887

9.039.312

-

957.946

-


13.891 15.413 22.410 23.685


Total Deposits 17.184 18.644 25.312 27.694


1.438 1.469 1.965 2.024

Total Assets 22.293 23.763 31.650 34.339


8.723 10.110 14.433 13.751


(EUR m) 2012Y 2013Y 2014Y 2015Y

0

1.000.000

2.000.000

3.000.000

4.000.000

5.000.000

6.000.000

7.000.000

2016 2017 2018 2019 2020 2021 2022 2023 2024

(€000)

Net Interest Income 217 188 195 232

Net Fee & Commission Income

19 18 21 20

Net Trading Income -11 25 42 51

Operating Expense 107 110 113 135

Problem Loans (€000) 16 10 10 7

Pre-tax Profit 115 122 129 161


In % 2012Y 2013Y 2014Y 2015Y

0%

20%

40%

60%

80%

100%




ROAE 7,51 8,18 7,35 7,57

Cost-to-Income 46,96 47,18 43,40 44,27


IFRS Tier 1 Leverage Ratio 6,94 6,57 6,53 6,19

Core Tier 1 Ratio 16,48 14,53 13,61 14,72

Gross Impaired Loans/ Loans at Amortised Cost

0,11 0,07 0,04 0,03 Total Capital (€mm)

2.106 2.043 1.523 1.497



+ Cooperative Group and solid franchise structure

+ Very good credit quality

+ Exceptional market position in Québec

– Regional concentration on Québec

– High level of debt among Canadian households

– Macroeconomic consequences of the fall in oil prices

http://www.desjardins.com/




Canada Canadian Imperial Bank of Commerce

Issuer ratings The Canadian Imperial Bank of Commerce (CIBC) is one the five largest financial insti-

tutions in Canada and is assessed as being a national systemically important bank by

the Canadian financial supervisory authority, the OSFI. CIBC serves approximately 11

million (primarily Canadian) customers (over 80% of net earnings are attributable to

Canadian operations) and employs 44,000 staff. The business activities of CIBC are

subdivided into three main areas: “Retail and Business Banking” (RBB), “Wealth Man-

agement” (WM) and “Capital Markets” (CM) in addition to the “Corporate and Other”

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

many other banks around the world, CIBC is currently undergoing a transformation

process with the aim of accelerating an increase in earnings, reducing structural costs

and improving efficiency. For 2016, CIBC has planned savings of CAD 100m and tar-

geted investments amounting to CAD 150m. With a cost-income ratio of 62.13%, CIBC

ranks in the midfield of the 15 largest banks in North America as at H2 2015 (reference

date 31 October). The RBB credit portfolio is dominated by private mortgages (64% as

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:

0.58% ) remains strong, even if some moderate pressure is expected here (decline in

oil prices, private household debt).

LT Outlook

Fitch AA- Stable


S&P A+ Stable


Key facts

Homepage:

www.cibc.com

Bloomberg ticker:

CM CN

5Y-Mid-CDS in bp:

NA

As at 12 May 2016 Source: Bloomberg, CIBC


(EUR m) 2012Y 2013Y 2014Y 2015Y

59%

15%

18%

8%

(€000)




Subsidiary Trust Preferred 1.088.573

GIC-backed Note 0

Total 13.396.160


187.006 173.913 183.392 194.696


Total Deposits 191.355 187.099 202.920 226.428


#WERT! 9.020 10.342 11.653

Total Assets 303.413 280.622 293.752 320.801


88.935 96.416 100.351 108.468


(EUR m) 2012Y 2013Y 2014Y 2015Y

0

500.000

1.000.000

1.500.000

2.000.000

2.500.000

3.000.000

3.500.000

4.000.000

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026+

(€0

00

)



41 20 -120 -99

Net Trading Income 315 211 46 65

Other Expense 645 582 588 499

Impaired Loans 1.441 1.091 1.015 983

Pre-tax Profit 3.078 2.960 2.665 2.996


In % 2012Y 2013Y 2014Y 2015Y

0%

20%

40%

60%

80%

100%




ROAE 19,97 19,66 17,09 17,83

Cost-to-Income 57,80 58,36 64,58 62,12




Gross Impaired Loans/ Loans at Amortised Cost

0,76 0,62 0,55 0,50 Total Capital (€mm)

16.226 15.568 14.074 15.378



+ Good market position and capitalisation


– High level of debt among Canadian households


https://www.cibc.com/en/personal-banking.html




Canada National Bank of Canada

Issuer ratings The National Bank of Canada (NBC; National Bank) has been formed on the back of a

number of mergers and ranks among the national systemically important banks. NBC

employs nearly 20,000 staff and serves ~2.4 million customers across 452 branches

(reference date: 31 Oct. 2015). Its geographic focus is clearly directed toward the prov-

ince of Québec (63% of private mortgages and HELOC portfolio as at Q1 2016), where

the bank is well-positioned in many areas of the private and corporate banking market.

NBC’s business operations can be categorised in four segments: “Personal and Com-

mercial Banking” (PCB), “Wealth Management” (WM), “Financial Markets” (FM) and

“Other” (which includes Treasury, among others). PCB and FM each contributed

around 40% to overall net income (excluding “Other”, according to NBC data) as at Q1

2016. On account of the rapidly changing banking market, NBC currently also finds

itself in the midst of restructuring processes, with the aim of generating sustainable

growth. The four key points of this strategy are streamlining processes, growth in Qué-

bec and Canada (esp. expansion in niche markets), international growth (expansion

into emerging economies) and intensification of white label operations to conquer new

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

NPL ratio remained unchanged from last year at the low level of 0.39%.

LT Outlook

Fitch A+ Stable


S&P A Stable


Key facts

Homepage:

www.nbc.ca

Bloomberg ticker:

NA CN

5Y-Mid-CDS in bp:

NA

As of 12 May 2016 Source: Bloomberg, NBS


(EUR m) 2012Y 2013Y 2014Y 2015Y

62%

12%

18%

8%

(€000)





GIC-backed Note 0

Total 8.663.068


63.807 62.317 68.848 73.284


Total Deposits 72.144 71.995 84.877 89.204


3.147 3.772 4.237 4.709

Total Assets 137.307 132.708 145.444 149.624


43.120 43.186 46.345 47.995


(EUR m) 2012Y 2013Y 2014Y 2015Y

0

500.000

1.000.000

1.500.000

2.000.000

2.500.000

3.000.000

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026+

(€0

00

)


Trading Account Income 68 138 72 148


Other Expense 241 249 265 278

Reserves for Impaired Customer Loans 161 149 169 141

Pre-tax Profit 1.476 1.313 1.248 1.314


In % 2012Y 2013Y 2014Y 2015Y

0%

20%

40%

60%

80%

100%




ROAE 20,65 17,25 15,93 15,10

Cost-to-Income 64,23 63,11 62,71 63,06



Core Tier 1 Ratio 7,34 8,73 9,23 9,90


(€mm) 6.701 6.987 6.477 6.837



+ Strong market position in Québec


+ Diversification strategy

– Concentration risks: Québec

– Major importance of volatile capital market business

– Private household debt, falling oil prices

https://www.nbc.ca/en/personal.html




Canada Royal Bank of Canada

Issuer ratings Headquartered in Toronto, Royal Bank of Canada (RBC) is the largest Canadian bank

(and sixth largest in North America) by assets as at Q1 2016. RBC (approximately

80,000 employees) offers over 16 million customers a broad spectrum of financial

products and services as a universal bank. Reporting is divided between the segments

“Personal & Commercial Banking” (PCB), “Capital Markets” (CM), “Wealth Manage-

ment” (WM), “Insurance”, “Investor & Treasury Services” and “Corporate Support”. PCB

represents the most important pillar of RBC’s operations (52% of net profit as at Q1

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

profit is generated from international operations. RBC is the market leader in many

areas of the Canadian PCB market, for example in consumer loans (including mort-

gages) with nearly 24% market share. In Q4 2015, RBC completed the acquisition of

City National Corporation (headquarters in Los Angeles, CA, USA), thereby increasing

the bank’s U.S. Presence, particularly in the field of wealthy private customers. At a

value of USD 5.33bn, the transaction was the largest M&A deal in the U.S. banking

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

comparatively positive economic situation, while the CET1 ratio (9.9%) meets the re-

quirements of Canadian regulations (national systemically important bank).

LT Outlook

Fitch AA Negative


S&P AA- Stable


Key facts

Homepage:

www.rbc.com

Bloomberg ticker:

RY CN

5Y-Mid-CDS in bp:

NA

As at 12 May 2016 Source: Bloomberg, RBC


(EUR m) 2012Y 2013Y 2014Y 2015Y

47%

42%

11%

(€000)





GIC-backed Note 0

Total 61.685.294


291.930 288.268 308.142 326.974


Total Deposits 395.354 397.010 434.783 482.769


22.675 21.534 25.775 30.269

Total Assets 635.935 606.181 665.910 743.796


216.576 224.904 263.412 286.629


(EUR m) 2012Y 2013Y 2014Y 2015Y

0

2.000.000

4.000.000

6.000.000

8.000.000

10.000.000

12.000.000

14.000.000

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026+

(€0

00

)



1.006 646 505 391

Net Trading Income 1.572 1.342 1.199 1.072

Other Expense 4.184 3.365 3.781 3.458


Pre-tax Profit 7.392 7.779 7.973 8.952


In % 2012Y 2013Y 2014Y 2015Y

0%

20%

40%

60%

80%

100%




ROAE 17,61 17,77 17,31 17,10

Cost-to-Income 62,65 61,78 61,84 60,81



Core Tier 1 Ratio 10,50 9,60 9,90 10,60


(€mm) 40.163 35.414 31.528 32.684



+ Strong market position in North America


– Private household debt, falling oil prices

– High proportion of volatile capital market income

http://www.rbc.com/canada.html




Canada Toronto-Dominion Bank

Issuer ratings The Toronto-Dominion Bank (TD) is headquartered in Toronto. As at Q1 2016, it is

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-

tomers) of which the majority are based in North America (Canada: 38,000; USA: ap-

proximately 25,000). The North American focus is reflected in the high proportions of

the segments “Canadian Retail” (64%; brand name: TD Canada Trust) and “U.S. Re-

tail” (27%; brand name: TD Bank; includes a 41.68% participation in TD Ameritrade) in

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-

ucts and services). Both retail segments include private and corporate banking, wealth

management, vehicle financing in addition to insurance and credit card portfolios in

Canada. TD can boast significant market shares and therefore high market power for

many financial service products of its private and corporate banking business. As at Q1

2016, TD’s CET1 ratio (fully loaded) amounted to 9.9% and is therefore on a par with

the similarly large RBC. An NPL ratio of 0.65% (Q1 2015: 0.57%) reflects the high cred-

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.

LT Outlook

Fitch AA- Stable


S&P AA- Stable


Key facts

Homepage:

www.td.com

Bloomberg ticker:

TD CN

5Y-Mid-CDS in bp:

79

As at 12 May 2016 Source: Bloomberg, TD


(EUR m) 2012Y 2013Y 2014Y 2015Y

37%

48%

12%

3%

(€000)




Subsidiary Trust Preferred 1.870.984

GIC-backed Note 0

Total 52.384.182


321.936 320.906 346.252 384.283


Total Deposits 376.453 381.870 425.307 481.626


#WERT! 18.206 21.923 26.283

Total Assets 625.978 607.786 680.042 764.683


189.768 201.900 234.052 265.962

Income statement summary €-Senior Unsec. Bonds vs. iBoxx € Fin. Senior

(EUR m) 2012Y 2013Y 2014Y 2015Y

-20

30

80

130

180

230

280

0 2 4 6 8 10 12 14

AS

W i

n b

p

Maturity years

iBoxx € Financial Senior TORONTO DOM BANK


Trading Account Income -32 -208 -238 -158


Other Expense 3.139 3.922 4.162 4.326


Pre-tax Profit 5.638 5.587 6.179 6.503


In % 2012Y 2013Y 2014Y 2015Y

0%

20%

40%

60%

80%

100%




ROAE 14,03 13,36 14,58 12,75

Cost-to-Income 62,17 65,00 63,78 63,11





(€mm) 37.113 31.333 28.689 29.788



+ Outstanding market position in Canada


+ Stable and high profitability

– High levels of debt among Canadian households


– Stronger competition on the U.S. market

https://www.td.com/about-tdbfg/our-business/index.jsp


NORD/LB Fixed Income Research

Page 15 of 25

Covered bonds The Canadian covered bond market – an overview

Analyst:

Kai Ebeling

Canadian issuers constitute

the third largest group of

issuers

With an issuance volume of EUR 7.75bn ytd (EUR-denominated benchmark

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-

denominated benchmarks outside the Eurozone. Despite the fact that its

covered bond legislation is relatively recent, Canadian covered bonds are

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

in place since 2012

From 2007 up to and including 2012, Canadian issuers issued covered

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

assets

According to the requirements of the covered bond legislation, only first-

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.



Page 16 of 25

A total of seven covered

bond issuers are currently

registered in Canada

The authorised issuers are Bank of Montreal (BMO), Bank of Nova Scotia

(BNS), La Caisse Centrale Desjardins (CCD), Canadian Imperial Bank of

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 Popolare Emilia A comparison of Canadian covered bond issuers (March 2016)

Banca Popolare Emilia Characteristics BMO BNS

1 CCD CIBC NBC

1 RBC TD

Issuer long term Rating (M//F/S&P/DBRS)

Aa3 / AA- / - / AA

Aa3 / AA- / A+ / AA

Aa2 / AA- / A+ / AA

Aa3 / AA- / A+ / AA

Aa3 / A+ / A / AA (low)

Aa3 / AA / - / AA

Aa1 / - / - / AA

Covered Bond Rating (M/F//S&P/DBRS)

Aaa / AAA / - / AAA

Aaa / AAA / - / AAA

Aaa / AAA / - / -

Aaa / AAA / - / -

Aaa / AAA / - / AAA

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 volume

CAD 15.2bn CAD 20.4bn CAD 5.9bn CAD 17.7bn CAD 9.8bn CAD 49.5bn CAD 29.0bn

OC 47.6% 24.4% 34.1% 84.4% 84.9% 30.3% 67.6%

Outstanding volume under former Covered Bond Programmes

CAD 2.0bn CAD 6.4bn CAD 1.5bn CAD 1.4bn CAD 2.0bn - CAD 5.9bn

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 (benchmark)

2a 2a 2a 2a 2a 2a 2a

Source: Issuers, Moody’s, NORD/LB Fixed Income Research 1 February 2016,

2 January 2016,

3 October 2015,

4 December 2015

Banca Popolare Emilia



Page 17 of 25

Limit on covered bond

volume is currently not a

hindrance

The Canadian financial supervisory authority – Office of the Superintendent

of Financial Institutions (OSFI) – limits the issue of covered bonds to a max-

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

to CRR

Since the Canadian banks listed above are not domiciled in the EEA, their

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

classification

If Canadian covered bonds were issued in EUR, GBP, JPY or USD, these

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

market volume

The following chart shows the development of the primary market volume of

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.



Page 18 of 25

Primary market volume (EUR bmk) - development Issuance volume by issuer (EUR bmk)

5.5

12.5

14.25

7.75

4

11

12

6

0

2

4

6

8

10

12

14

0

2

4

6

8

10

12

14

16

2013 2014 2015 2016 ytd

nu

mb

er

in E

UR

bn

Issuance volume Benchmarks

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

BMO BNS CCDJ CM NACN RY TD

in E

UR

bn

2013 2014 2015 2016 ytd

Source: Market data, NORD/LB Fixed Income Research Source: Market data, NORD/LB Fixed Income Research

Continuous increase in

primary market volume

Since 2013, both the number of EUR-denominated benchmarks and the

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

10% 9%

39%

64%

62%

53%

52%

36%28%

39%

10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014 2015 2016

year

1Y-3Y 3Y-5Y 5Y-7Y

0

1

2

3

4

5

6

7

8

2013 2014 2015 2016 ytd

BMO BNS CCDJ CM NACN RY TD


Issues are concentrated on

maturities between three and

five years

A breakdown of issues by maturity band makes clear that the majority of

new issues were issued in the 3Y-5Y maturity segment. While short-dated

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.



Page 19 of 25

Seven years represent the

maximum to date

An examination of maturities according to the respective issuer shows that

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

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2013 2014 2015 2016

0%

10%

20%

30%

40%

50%

60%

Ba

nks

Asse

t M

an

ag

ers

Fu

nds

Cen

tra

l B

anks/S

SA

Insu

ran

ce

s

Pe

nsio

ns

Reta

il/P

rivate

We

alt

Corp

ora

tes

Hed

ge F

und

s

Oth

er

2013 2014 2015 2016


German investors are the

most important group of

investors

For Canadian issuers, German and Austrian investors are still the most im-

portant group of purchasers for EUR-denominated benchmark issuers, hav-

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)

0

2

4

6

8

10

12

14

16

0 1 2 3 4 5 6 7 8 9 10

AS

W in

bp

maturity in years

BMO BNS CCDJ CM NACN RY TD CA

-20

-10

0

10

20

30

40

50

60

70

80

Mai 15 Jun 15 Jul 15 Aug 15 Sep 15 Okt 15 Nov 15 Dez 15 Jan 16 Feb 16 Mrz 16 Apr 16

ASW

in b

p

Core Eurozone Periphery Eurozone Periphery Multi

Other Europe Overseas CA

Source: Bloomberg, NORD/LB Fixed Income Research Source: Bloomberg, NORD/LB Fixed Income Research



Page 20 of 25

Secondary market – currently

very low spread level

When looking at the current spread level (EUR-denominated benchmark

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.



Page 21 of 25

Appendix Contacts Fixed Income Research

Michael Schulz Head +49 511 361-5309 [email protected]

Kai Niklas Ebeling Covered Bonds +49 511 361-9713 [email protected]

Mario Gruppe Public Issuers +49 511 361-9787 [email protected]

Michaela Hessmert Banks +49 511 361-6915 [email protected]

Christopher Kief Corporates / Retail Products +49 511 361-4710 [email protected]

Melanie Kiene Banks +49 511 361-4108 [email protected]

Jörg Kuypers Corporates / Retail Products +49 511 361-9552 [email protected]

Matthias Melms Covered Bonds +49 511 361-5427 [email protected]

Sascha Remus Corporates / Retail Products +49 511 361-2722 [email protected]

Norman Rudschuck Public Issuers +49 511 361-6627 [email protected]

Martin Strohmeier Corporates / Retail Products +49 511 361-4712 [email protected]

Kai Witt Corporates / Retail Products +49 511 361-4639 [email protected]

Markets Sales

Carsten Demmler Head +49 511 361-5587 [email protected]

Institutional Sales (+49 511 9818-9440)

Daniel Gutschka (Head) [email protected] Daniel Novotny-Farkas [email protected]

Julia Bleser [email protected] Gabriele Schneider [email protected]

Thorsten Bock [email protected] Dirk Scholden [email protected]

Uwe Kollster [email protected] Uwe Tacke [email protected]

Sales Saving Banks / Regional Banks (+49 511 9818-9400)

Christian Schneider

(Head) [email protected] Stefan Krilcic [email protected]

Oliver Bickel [email protected] Martin Koch [email protected]

Tobias Bohr [email protected] Bernd Lehmann [email protected]

Kai-Ulrich Dörries [email protected] Jörn Meißner [email protected]

Marc Ehle [email protected] Lutz Schimanski [email protected]

Sascha Goetz [email protected] Brian Zander [email protected]

Fixed Income / Structured Products Sales Europe (+352 452211-515)

René Rindert (Head) [email protected] Patricia Lamas [email protected]

Morgan Kermel [email protected] Laurence Payet [email protected]

Corporate Sales

Shipping / Aircraft +49 511 9818-8150 Corporate Clients +49 511 9818-4003

Real Estate / Structured Finance

+49 511 9818-8150 FX/MM

+49 511 9818-4006

Syndicate / DCM (+49 511 9818-6600)

Thomas Cohrs (Head) [email protected] Wlada Pesotska [email protected]

Axel Hinzmann [email protected] Andreas Raimchen [email protected]

Thomas Höfermann [email protected] Udo A. Schacht [email protected]

Alexander Malitsky [email protected] Marco da Silva [email protected]

Julien Marchand [email protected] Lutz Ulbrich [email protected]

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

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Page 22 of 25

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Page 23 of 25

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Information Constituting Recommendations Concerning Financial Instruments or Issuers thereof dated 19 October 2005.



Page 24 of 25

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Past performance is no guarantee of future results.

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content in terms of correctness, accuracy or otherwise.



Page 25 of 25

Arrangements for the confidential treatment of sensitive customer and business data as well as for avoiding and handling conflicts of

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Compliance Unit upon completion of the financial analysis. Any subsequent amendment of the relevant financial analysis may only be

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knowledge of such conflicts of interest. Further information on these matters is set forth in our Financial Analysis or Conflict of Interest

Policy which is available from the Compliance Unit of NORD/LB upon request.

Time of going to press

19 May 2016 09:15h (CET)

Disclosure of NORD/LB’s potential conflicts of interest according to § 34b Abs. 1 WpHG and

§ 5 FinAnV

NORD/LB or one of its affiliated companies was a co-lead manager of a consortium, which took over the last of the issues of securities

placed by Bank of Montreal, Royal Bank of Canada, The Bank of Nova Scotia and The Toronto-Dominion Bank (TD) under analysis in

the past 12 months.

Additional disclosures

Sources and price indications

Depending on the issuer, we use information from financial data suppliers, our own estimates, company data and the public media for the

preparation of our financial analyses. Unless otherwise stated in the report, prices indicated relate to the closing price on the previous

day. Fees and commissions apply to securities (buy, sell, hold) and these may reduce the yield on investments.

Analytical methods and updates

In the preparation of financial analyses, we take company-specific methods used for fundamental securities’ analysis, quantita-

tive/statistical methods and models, as well as technical analytical methods as the basis for valuations and for the regular updates. It

should be noted that the results of analyses provide a snapshot overview and that past developments do not constitute a reliable indica-

tor for future profits. The basis of the valuations is subject to unforeseen change at any time, potentially leading to different conclusions.

The present report is prepared on an irregularly basis. Recipients are not automatically entitled to receive report update publications.

Recommendation system and history of last 12 months

Positive: Positive expectations for the issuer, a security type or a specific security of an issuer.

Neutral: Neutral expectations for the issuer, a security type or a specific security of an issuer.

Negative: Negative expectations for the issuer, a security type or a specific security of an issuer.

Relative value (RV): Relative value recommendation in comparison to a market segment, an issuer or a maturity.

Issuer / security Date Recommendation Bond type Cause

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