DBRS expects Canadian financial institutions to maintain their strong presence in the benchmark US dollar covered bond market, buoyed by demand for Canadian assets and attracted by the funding levels available there.

Jerry Marriott, managing director, Canadian RMBS/ABS group at DBRS, made the forecast in a mid-year ABS review conference call on Wednesday, where demand for Canadian assets in general was highlighted.

“The asset performance in Canada remains strong and very strong when you think of it in a global context,” said Marriott.

He said that this has supported sales of Canadian financial products, including covered bonds. According to DBRS, which rates all seven Canadian covered bond programmes, some C$34bn (Eu23.9bn/US$34.5bn) of covered bonds have now been issued out of Canada.

“The covered bond market in Canada really got kicked off in late 2007 with an issuance by the Royal Bank of Canada and since then has been very successful,” he said. “Those – the covered bonds – while they’re relatively new to Canada, have been around in Europe, I believe, since the 1700s in Germany and it’s certainly a very important form of funding for European banks and is quickly becoming an important alternative funding source for Canadian banks.

“You can also see that while the overall issuance has gone up, there’s been a preponderance of issuance in the last while, particularly in the US dollar market,” he added. “I think that speaks very well to the recognition of the Canadian banks’ credit quality and also it speaks very well to just the fact that the economics are working for US issuance for Canadian banks.”

Canadian covered bond issuance by currency (Source: DBRS)

Marriott said that DBRS expects to continue to see regular issuance in the market.

“It has become and will continue to be a regular source of funding for the Canadian banks,” he said.

The superior performance of Canadian assets was also underlined with respect to the residential mortgage sector, where this was contrasted with US assets (see chart).

“In terms of Canadian prime mortgages, we do not see any problems on the horizon there,” said Marriott.

“We have seen a shift in focus to issuance in the CMB (Canada Mortgage Bond) programme and covered bonds rather than in the private securitisation,” he added, “but in terms of asset performance we do not see that being a problem.”

Prime mortgage defaults (Source: DBRS)

(DEL 90+ is delinquencies of 90 days or more)