Fitch Affirms BMO's Registered Covered Bonds at 'AAA'; Outlook Stable

Fitch Ratings has affirmed BMO Bank of Montreal's (BMO, 'AA-/F1+'/Outlook Stable) outstanding CAD-equivalent 4.2 billion registered mortgage covered bonds at 'AAA' with a Stable Outlook. The action follows Fitch's annual review of the program.

KEY RATING DRIVERS

The rating is based on BMO's Long-term Issuer Default Rating (IDR) of 'AA-', an unchanged Discontinuity Cap (D-Cap) of 3 (moderate high risk) and the 93.5% asset percentage (AP) (which equals Fitch's 'AAA' breakeven AP). The Stable Outlook for the covered bonds rating is based on the Stable Outlook on both the Canadian sovereign rating and BMO's IDR. Since bail-in is not an explicit provision under the current Canadian framework, in Fitch's view, the IDR remains a satisfactory indicator of the likelihood that the recourse against the cover pool would be enforced, and no IDR uplift is applicable.

The 93.5% AAA' breakeven AP, corresponding to a breakeven OC of 7% is driven by the cover pool's credit loss of 5.5%, followed by the asset disposal loss component of 5% due to maturity mismatches in an 'AAA' scenario. The cash flow valuation component leads to a lower 'AAA' breakeven OC by 2% due to the short weighted average life of the mortgages, generally three to five years, which results in a high value for the cover pool. The breakeven AP considers whether timely payments are met in an 'AA' scenario and tests for recoveries given default of at least 91% in an 'AAA' scenario.

The 5.5% 'AAA' credit loss represents the impact on the breakeven OC from the 13.2% weighted average (WA) default rate and the 60.3% WA average recovery rate for the mortgage cover assets. This reflects a reduction in the 'AAA' credit loss from Fitch's prior analysis of 6.7% due to the cover pool's lower WA sustainable loan-to-value of 71.5% vs. 77.6% and an increase in credit score to 750 from 745. The improvement in the credit loss was balanced by the buffer built into the asset disposal loss to avoid volatility in breakeven OC.

Fitch takes into account the contractual AP maintained in the program since amounts in excess of the contractual commitment are secured back to BMO through the demand loan and therefore not available to covered bond holders in the event of issuer default.

RATING SENSITIVITIES

The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded by three or more notches to 'A-' or below; or (ii) the number of notches represented by the D-Cap is reduced to 0; or (iii) the AP that Fitch considers in its analysis increases above Fitch's 'AAA' breakeven level of 93.5%.

The Fitch breakeven AP for the covered bond rating will be affected, amongst others, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore the breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time.

More details on the cover pool and Fitch's analysis will be available in a credit update report, which will shortly be available at 'www.fitchratings.com'.

Additional information is available on www.fitchratings.com

Applicable Criteria and Related Research:

--'Covered Bonds Rating Criteria' (August 2014);

--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 2014);

--'Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum' (May 2014);

--'Covered Bonds Rating Criteria - Mortgage Liquidity and Refinancing Stress Addendum' (February 2015);

--'Canadian Residential Mortgage Loan Loss Model Criteria' (April 2015).

Applicable Criteria and Related Research:

Covered Bonds Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753052

Counterparty Criteria for Structured Finance and Covered Bonds

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158

Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744175

Covered Bonds Rating Criteria -- Mortgage Liquidity and Refinancing Stress Addendum

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=861806

Canadian Residential Mortgage Loan Loss Model Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864357

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984042

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