OREANDA-NEWS. Fitch Ratings has today affirmed the ratings for National Bank of Canada's (NBC) at 'A+/F1'. The Rating Outlook remains Stable. A full list of rating actions follows at the end of this press release.

This rating action follows Fitch's periodic review of the Canadian Banks Peer Group, which includes Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Canadian Imperial Bank of Commerce (CIBC), Caisse Centrale DesJardins (CCD), National Bank of Canada (NBC), Royal Bank of Canada (RBC) and Toronto-Dominion Bank (TD).

For further discussion, please refer to the Canadian Banks Peer Review Special Report to be published shortly.

KEY RATING DRIVERS

IDRs, NATIONAL RATINGS AND SENIOR DEBT

National Bank of Canada's (NBC) ratings reflect the company's strong asset quality and stable operating performance. NBC's ratings are further supported by its ample liquidity profile and favorable market share in its primary market of Quebec. They are constrained by lower regulatory capital levels and limited company profile relative to higher rated Canadian bank peers. As the smallest of the 'Big Six' Canadian, NBC lacks the scale and geographic diversity benefiting larger Canadian competitors.

During 2015, NBC reported solid earnings driven primarily by continued growth in earning assets and wealth management. The wealth management segment in particular reported a significant increase in income from both organic growth and earnings realized from its acquisition of TD Waterhouse Institutional Services. Fitch views NBC's continued success in the wealth management positively as it underscores management's successful execution of a disciplined strategy to expand its wealth management platform across Canada.

NBC's asset quality continues to outperform Canadian banking peers. Like Canadian bank peers, NBC's asset quality performance has benefited from the continued strength of Canada's economy. Given cyclical lows on impaired loans and credit losses coupled with historically high consumer indebtedness, Fitch expects some level of asset quality deterioration as economic growth slows and credit conditions normalize.

NBC's ratings are also supported by the bank's strong market position, deposit market share and brand recognition in its primary market of Quebec. Fitch generally views the Quebec economy as less volatile given its slightly weaker historic growth and lower household indebtedness relative to the broader Canadian economy. While NBC's franchise in Quebec presents some competitive advantages in its core market, NBC is particularly sensitive to any idiosyncratic stress in Quebec's economy due to its relative lack of geographic diversity.

NBC's ratings continue to be constrained by lower capital levels and weaker profitability than Canadian banking peers. While Fitch views NBC's capital as a sufficient cushion in an adverse economic scenario, NBC is more vulnerable in severe stress tests than higher rated peers given its lower capital base. Furthermore, NBC's earnings profile includes a growing portion of revenue derived from financial markets segment, which Fitch views as a more volatile sector.

SUPPORT RATING AND SUPPORT RATING FLOOR

The affirmation of the NBC's Support Rating (SR) of '2' and Support Rating Floor (SRF) of 'BBB-' reflect Fitch's view that the likelihood of support remains relatively high for Canadian Banks due to their systemic importance in the country, significant concentration overall of Canadian banking assets amongst the institutions noted above, which account for over 90% of total banking assets, the large size of the banking sector with banking assets at 2.1x Canada's GDP, and the Canadian banks' position as key providers of financial services to the domestic economy.

In Fitch's view, Canadian banking authorities through the CDIC Act, have wide latitude to resolve a troubled bank including re-capitalizing an institution, creating a bridge bank, or imposing losses on creditors.

Fitch recognizes that the government's willingness to provide support for D-SIFI's in Canada has been reduced demonstrated by Department of Finance consultation paper which outlines the proposed bail-in regime as Canadian banking regulators seek to protect tax payers from the risk of a large financial institution failing. This is evidenced by the issuance of non-viability contingent capital (NVCC) instruments, resolution powers given regulatory authorities under the CDIC Act, and other initiatives that demonstrate the Canadian government's progress to reduce the propensity of state support for banks going forward.

NBC's IDRs and senior debt ratings do not benefit from support because their Viability Ratings (VRs) are all currently above their SRFs.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and other hybrid capital issued by NBC and its subsidiaries are all notched down from the common VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably.

NBC's subordinated debt is notched one level below its VR of 'aa-' for loss severity in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles.

The preferred securities of NBC Asset Trust are non-cumulative preferred securities which are notched five below the VR, made up of two notches down for non-performance and three notches down for loss severity.

SUBSIDIARY AND AFFILIATED COMPANY

All of the subsidiaries and affiliated companies including National Bank of Canada New York are reviewed as part of the Canadian Bank peer review factor in a high probability of support from parent institutions to the subsidiaries. This reflects 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.

RATING SENSITIVITIES

IDRs, NATIONAL RATINGS AND SENIOR DEBT

NBC's ratings are solidly situated at their current level. However, significant growth into new markets outside Canada or outsized growth in new, higher risk segments could potentially pressure the ratings.

NBC's ratings are highly sensitive to the company's stable earnings and credit quality. Outsized losses and or performance volatility with respect to NBC's financial markets business would be viewed negatively, particularly if the business grows to represent a significant portion of NBC's revenues. Moreover, a housing shock concentrated in the province of Quebec that results in adverse loan performance and capital impairment may also result in a negative credit action.

SUPPORT RATING AND SUPPORT RATING FLOOR

SR of '2' incorporates Fitch's expectation that there could be some level of support for Canadian Banks going forward although this has been weakened given credible resolution framework. Although Canadian authorities have taken steps to improve resolution powers and tools, they maintain a flexible approach to bank resolution.

Fitch's assessment of continuing support for Canadian D-SIFI's has to some extent relied upon resolution powers granted regulators under the CDIC ACT as well as the potential size, structure, and feasibility of NVCC implementation.

Fitch's view on support could change should the CDIC Act diminish powers of the CDIC to recapitalize a failing institutions leading to a downgrade of the SR and SRF.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The subordinated debt and hybrid capital ratings are primarily sensitive to any change in the VRs of the banks (or bank subsidiaries).

The preferred securities of NBC Asset Trust preferred securities, which Fitch gives five notches from NBC's VR given management and regulatory authorities' powers to suspend dividends.

SUBSIDIARY AND AFFILIATED COMPANIES

The subsidiary and affiliated company ratings including National Bank of Canada New York Branch are primarily sensitive to any change in the VRs of the banks.

Fitch has affirmed the following ratings with a Stable Outlook:

National Bank of Canada
--Long-term IDR at 'A+';
--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 '2';
--Support Rating Floor at 'BBB-'.

National Bank of Canada New York Branch
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.

NBC Asset Trust
--Preferred Stock at 'BBB-'.