Moody’s Investors Service has affirmed its ratings on National Bank of Canada and its subsidiaries. However, the ratings agency returned its outlook for National Bank to stable from positive, reflecting Moody’s view that the company’s performance on key credit ratios is consistent with its peers.

The rating agency noted that National Bank has improved its credit profile over the last several years. A disciplined focus on its primary market — Quebec-based direct banking — and improved underwriting standards and practices throughout the organization have resulted in more predictable profitability and better asset quality, it says.

Moody’s said that National Bank’s rating is also supported by its strong market position in Quebec — number two in direct retail banking and number one in direct commercial banking. Moreover, the Quebec market’s differentiating factors, both cultural and linguistic, provide National Bank with an enhanced barrier against competitive pressures.

In addition to National Bank’s performance on key credit ratios, Moody’s based its decision to change the outlook to stable on the following two issues: loan granularity and a strategic decision to accept a higher level of market risk.

Regarding loan granularity, Moody’s remains concerned that the bank may be compelled to make large commitments to major Quebec private and/or semi-public institutions. “It is for this reason that we emphasize improved loan granularity as a key driver of future upward rating pressure,” it said.

As for market risk, the rating agency notes that the bank has made a strategic decision to accept more market risk within its wholesale banking segment. Though pre-provision, pre-tax profitability has been stable as the bank has implemented its strategy, volatility in the capital markets has also been relatively low. Moody’s is concerned that this strategy increases a risk category that previously was not a significant consideration in National Bank’s rating.