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Fitch Affirms Large Canadian Bank Ratings Following Industry Peer Review; Outlook Stable

January 24, 2014

CHICAGO --(BUSINESS WIRE)-- Fitch Ratings has affirmed the ratings of the seven largest Canadian banking institutions by assets (referred to as Canadian Banks) following a peer review committee. The seven financial institutions included in this peer review are: --Bank of Montreal (BMO; rated 'AA-/F1+'; --Bank of Nova Scotia (BNS; rated 'AA-/F1+'); --Canadian Imperial Bank of Commerce ( CIBC ; rated 'AA-/F1+'); -- Caisse Centrale DesJardins (CCD; rated 'AA-/F1+'); --National Bank of Canada ( NBC ; rated 'A+/F1'); --Royal Bank of Canada (RBC; rated 'AA/F1+'); --Toronto-Dominion Bank (TD; rated 'AA-/F1+'). The Rating Outlooks for all seven institutions are Stable. A complete list of ratings is included at the end of this press release. This rating action follows a periodic review of the Canadian Banking sector. Fitch will publish the main findings of this review in a report 'Canadian Banks: 2013 Another Solid Year, But Consumer Risks Lurk' available at ' '. KEY RATING DRIVERS - IDRS, VRs, AND SENIOR DEBT The rating affirmation of the Canadian Banks reflects good and stable earnings levels, continued good credit quality, availability of credit insurance with respect to a significant portion of their mortgage portfolios, strong funding and liquidity positions, and sound capital ratios which also compare favorably to similarly rated international peers. These strengths position Canadian bank ratings to withstand a moderate downturn in the Canadian housing market and deterioration in consumer credit profiles, while limiting the potential magnitude of negative rating migration in more adverse scenarios. Fitch sees the potential for Canadian Bank credit quality to deteriorate, as the housing market is nearing a cyclical peak. Canadian banks face slowing loan growth amid strong competition that, combined with the low interest rate environment, will continue to weigh on earnings though additional margin compression. The Canadian banks are vulnerable to credit deterioration in their domestic consumer loan portfolios given high levels of consumer indebtedness in Canada , combined with Fitch's view of some overvaluation in the Canadian housing market. Debt to personal disposable income in Canada continues to grow and now measures nearly 165%. This limits housing affordability and makes consumers particularly susceptible to negative shocks to their income levels. Fitch's sustainable home price model for Canadian home prices indicates some overvaluation in the housing market, which could be as high as 25% in certain geographies. Fitch's ratings incorporate a base case housing scenario of a plateauing and orderly cooling of the housing market. This includes the assumption that consumers will at least maintain current leverage, if not actively work to deleverage their personal balance sheets. In order for this to occur, employment rates and income levels must remain at least stable, if not show some better growth to allow for the maintenance or potential reduction in consumer indebtedness. Should employment rates or income levels not improve or at least remain stable in the face of a possibly plateauing housing market, it is likely that some higher credit costs may develop from the banks' consumer portfolios. Mitigating the potential knock on effects of a plateauing and/or cooling housing market on the Canadian banks' results include a preponderance of mortgages insured with the Canadian Mortgage and Housing Corporation (CMHC), relatively low loan-to-value (LTV) ratios on the banks' uninsured mortgage portfolios, and continued strong Basel III capital ratios. Insured mortgages represent approximately 60% of the overall mortgages collectively on the banks' balance sheets. This is important because insured mortgages carry LTV's at origination of greater than 80%, so in the event there is weakness in the housing market across Canada it is likely that these mortgages would be the first to incur losses. Losses would be first absorbed by the CMHC, and not the banks. This supports Fitch's Stable Rating Outlook for the banks. Additional support for Canadian bank ratings and the Stable Rating Outlook are strong Basel III Tier one common (CET1) ratios. The group's Basel III CET1 ratios averaged 10.3% as of YE2013, comparing favorably to international bank peers. Fitch has performed a point-in-time severe consumer stress on each Canadian bank's balance sheet, which assumes CMHC insurance pays out in full. This exercise indicates that the banks' capital position could withstand a moderate to severe consumer stress, not including any management actions to bolster capital ratios such as cutting dividends, selling assets, or raising incremental capital. RATING SENSITIVITIES - IDRS, VRs, AND SENIOR DEBT Canadian Bank ratings are some of Fitch's highest financial institution ratings globally. Given the banks' earnings growth challenges, concerns regarding consumer indebtedness, and a likely plateauing housing market there is minimal, if any, upside to bank ratings over a near- to medium-term time horizon. Pressure to ratings could result should the Canadian housing market corrects more severely than anticipated. Drivers of a more severe than expected housing market correction are largely exogenous macroeconomic risks such as shocks to global markets or commodity (particularly oil and gas) markets, unexpected increases in interest rates which impact consumers ability to service debt obligations, as well as macroeconomic weakness in China or Europe that flows through to adversely impact the Canadian economy. Should the CMHC alter its mortgage insurance programs or not fully make banks whole for potential loan losses on insured mortgages due to underwriting defects or other reasons, ratings could be downgraded. Company specific rating sensitivities for RY, BNS, NBC , and BMO are related to their sizable component of capital markets revenue, which can typically ranges between 15 to 25% of overall revenue. Capital markets revenue for each bank has been an important contributor to revenue and earnings, particularly in the last quarter. However, its historically volatile nature could pressure ratings particularly if its contribution to revenue grows and remains above 25% for an extended period. Banks with significant presence outside of Canada , including RY in the U.S. and global capital markets, BNS in Latin America and Asian Markets, and BMO and TD largely in the U.S retail market, could have their ratings impacted should there be weakness in any of these markets, should it adversely impact credit quality and earnings generation. For BMO and TD, while the U.S. operations do provide good revenue diversity which is a positive from a credit perspective, returns on equity (ROE) in the U.S. are also lower at this point in the cycle, thereby diluting these firms overall ROEs. CCD and NBC , given their concentration to the province of Quebec , are particularly sensitive to any changes in the economy of Quebec . Fitch notes that CCD has a higher long-term IDR of 'AA-' compared to NBC's 'A+', primarily because CCD maintains significantly higher capital ratios than NBC and that CCD doesn't engage in significant capital markets activities. KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR The banks' current Issuer Default Ratings (IDRs) are equalized with their viability ratings (VRs), which remain above the support rating floor of 'A-' and reflect the very high fundamental credit quality of the institutions. All the major Canadian banks have a support rating of '1' and a support rating floor of 'A-', reflecting the banks' systemic importance to the Canadian economy and their domestic strategically important (D-SIB) designation, and the credit quality and financial resources of Canada (rated 'AAA/F1+', Outlook Stable) to provide support if necessary. At the banks' current VRs, the long-term IDRs would not be affected by a change in support rating floor should Fitch's view of support change. Fitch published two special reports on its view of bank support in September 2013 , 'The Evolving Dynamics of Support for Banks' and 'Bank Support: Likely Rating Paths' which detail changing views on sovereign support for banks. Fitch may change its support rating floor as a result of evolving sovereign support. SENSITIVITY/RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by the banks and by various issuing vehicles are all notched down from the banks' (or bank subsidiaries') VRs in accordance with Fitch's assessment of each instrument's respective nonperformance and relative loss severity risk profiles. The subordinated debt and hybrid capital ratings are primarily sensitive to any change in the VRs of the banks (or bank subsidiaries). SENSITIVITY/RATING DRIVERS - SUBSIDIARY AND AFFILIATED COMPANY RATINGS All of the subsidiaries and affiliated companies reviewed as part of the Canadian bank peer review factor in a high probability of support from parent institutions to the subsidiaries. This reflects the fact that performing parent banks have very rarely allowed subsidiaries to default. It also considers the high level of integration, brand, management, financial and reputational incentives to avoid subsidiary defaults. In analyzing CCD, the issuing arm of the mutual cooperative banking institution The DesJardins Group (DESJ), Fitch uses both the financial statements of DESJ and CDD in performing its analysis since CDD is consolidated within the operations of DESJ. Fitch has affirmed the following ratings: Bank of Montreal --Long-term IDR at 'AA-'; Outlook Stable; -- VR at 'aa-'; --Short-term IDR at 'F1+'; --Senior unsecured debt at 'AA-'; --Subordinated debt at 'A+'; --Commercial paper at 'F1+'; --Support Rating at '1'; --Support Floor at 'A-'. BMO Harris Bank National Association (formerly Harris N.A. ) --Long-term IDR at 'AA-'; Outlook Stable; -- VR at 'bbb+'; --Long-term deposits at 'AA'; --Short-term IDR at 'F1+'; --Short-term deposits at 'F1+'; --Support Floor at '1'. BMO Subordinated Notes Trust --Subordinated debt at 'A+'. BMO Capital Trust D BMO Capital Trust E BMO Capital Trust II --Preferred stock rating at 'BBB'. Marshall & Ilsley Corporation --Senior debt affirmed at 'AA-'. M&I Marshall & Ilsley Bank --Long-term deposits at 'AA'; --Senior debt at 'AA-'; --Subordinated debt at 'A+'; --Short-term deposits at 'F1+'. M&I Bank FSB --Long-term deposits at 'AA'; --Short-term deposits at 'F1+'. Bank of Nova Scotia --Long-term IDR at 'AA-'; Outlook Stable; --Short-term IDR at 'F1+'; --Long-term deposits at 'AA-'; --Senior debt at 'AA-'; --Subordinated debt at 'A+'; --Short-term debt at 'F1+'; -- VR at 'aa-'; --Support Rating at '1'; --Support Rating Floor at 'A-'. Scotiabank Capital Trust -- Trust Securities at 'BBB'. Canadian Imperial Bank of Commerce --Long-term IDR at 'AA-'; Outlook Stable; --Short-term IDR at 'F1+'; -- VR at 'aa-' --Short-term debt at 'F1+'; --Senior unsecured debt at 'AA-'; --Senior market-linked securities at 'AA-emr'; --Subordinated debt at 'A+'; --Preferred stock at 'BBB'; --Support Rating at '1'; --Support Rating Floor at 'A-'. Canadian Imperial Holdings, Inc. --Short-term debt at 'F1+'. CIBC World Markets Plc --Long-term IDR 'AA-'; Outlook Stable; --Short-term IDR 'F1+'; --Support Rating '1'. CIBC Capital Trust --Preferred stock at 'BBB'. Caisse Centrale Desjardins --Long-term IDR at 'AA-'; Outlook Stable; --Short-term IDR at 'F1+'; --Senior unsecured debt at 'AA-'; --Support at '1'; --Support Floor at 'A-'. Capital Desjardins --Subordinated debt at 'A+'. National Bank of Canada --Long-term IDR at 'A+'; Outlook Stable; --Short-term IDR at 'F1'; -- VR at 'a+'; --Senior debt at 'A+'; --Subordinated debt at 'A'; --Preferred stock at 'BBB-'; --Short-term deposits at 'F1'; --Support Rating at '1'; --Support Rating Floor at 'A-'. National Bank of Canada New York Branch --Short-term IDR at 'F1'; --Commercial paper at 'F1'. NBC Asset Trust --Preferred Stock at 'BBB-'. Royal Bank of Canada --Long-term IDR at 'AA'; Outlook Stable; -- VR at 'aa'; --Short-term IDR at 'F1+'; --Short-term debt at 'F1+'; --Senior unsecured debt at 'AA'; --Subordinated debt at 'AA-'; -- Market-Linked Securities at 'AAemr'; --Support Rating at '1'; --Support Rating Floor at 'A-'. RBC Capital Trust --Preferred stock at 'BBB+'. Toronto-Dominion Bank --Long-term IDR at 'AA-'; Outlook Stable; --Short-term IDR at 'F1+'; --Short-term debt at 'F1+'; -- VR at 'aa-'; --Senior debt at 'AA-'; --Subordinated debt at 'A+'; --Preferred at 'BBB'; --Support Rating at '1'; --Support Floor at 'A-'. TD Bank U.S. Holding Company --Long-term IDR at 'AA-'; Outlook Stable; --Short-term IDR at 'F1+'; --Support Rating at '1'. TD Bank, NA --Long-term IDR at 'AA-'; Outlook Stable; --Short-term IDR at 'F1+'; --Viability Rating at 'a'; --Long-term deposits at 'AA'; --Short-term deposits at 'F1+'; --Senior debt at 'AA-'; --Support Rating at '1'. TD Capital Trust III, IV Northgroup Preferred Capital Corporation --Preferred at 'BBB'. Additional information is available at ' '. The Toronto Dominion Bank did not participate in the rating process other than through the medium of its public disclosure.. Applicable Criteria and Related Research : --'Global Financial Institutions Rating Criteria' ( Aug. 15, 2012 ); --'Rating FI Subsidiaries and Holding Companies' ( Aug. 10, 2012 ); --'Assessing and Rating Bank Subordinated and Hybrid Securities' ( Dec. 5, 2012 ); --'Rating Criteria for Banking Structures Backed by Mutual Support Mechanisms' ( Dec. 20, 2012 ); --'The Evolving Dynamics of Support for Banks' ( Sept. 11, 2013 ); --'Bank Support: Likely Rating Paths' ( Sept. 11, 2013 ); --'2014 Outlook: Canadian Banks' ( Nov. 25, 2013 ); --'Canada Sovereign Report' ( Sept. 13, 2013 ); --'2014 Outlook: Global Trading and Universal Banks' ( Dec. 12, 2013 ). Additional Disclosure Solicitation Status ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS . IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE ' WWW.FITCHRATINGS.COM '. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Ratings Justin Fuller , CFA, +1 312-368-2057 (Primary Analyst for RY, BNS, BMO, CCD; Secondary Analyst for CIBC , NBC , TD) Director Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 or Meghan Neenan , CFA, +1 212-908-9121 (Primary Analyst for CIBC , TD; Secondary Analyst for RY) Senior Director or Ryan Doyle , +1 212-908-0358 (Primary Analyst for NBC ) Director or Christopher Wolfe , +1 212-908-0771 (Secondary Analyst for BNS) Managing Director or Julie Solar , +1 312-368-5472 (Secondary Analyst for BMO) Senior Director or Bain Rumhor, CFA, +1 312-368-3153 (Secondary Analyst for CCD) Associate Director or Committee Chairperson Nathan Flanders , +1 212-908-0827 Managing Director or Media Relations: Brian Bertsch , +1 212-908-0549 Source: Fitch Ratings

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