Moody’s Investors Service affirmed the ratings and outlook of National Bank of Canada, following its announced buyout of its clients’ asset-backed commercial paper exposure.

The bank said that it would acquire $2 billion of non-bank administered ABCP held in mutual funds and pooled funds of subsidiaries of the bank, as well as ABCP held by other of the bank’s investing clients.

Moody’s affirmed NBC’s ratings because any losses accruing to the bank as a result of bringing this exposure on-balance-sheet are very likely to be well-below one-year’s pre-tax, pre-provision earnings. Moreover, Moody’s does not expect the impact of any such loss on the bank’s capital ratios will be material.

In affirming NBC’s ratings, Moody’s raised two concerns. First, by acquiring $2 billion in assets whose value could deteriorate measurably in the months ahead, NBC could sustain a deterioration in earnings, efficiency, and capital ratios just prior to a negative turn in the credit cycle, leaving the bank’s financial strength more susceptible to other stresses. Second, allowing its proprietary mutual funds to build sizable concentrations in the non-bank administered, ABCP asset class raises concerns with NBC’s enterprise risk management, which Moody’s has historically viewed as quite strong.

Moody’s noted that NBC’s ratings could ultimately be downgraded if the losses related to the ABCP exposure meaningfully exceed two-quarter’s earnings and if Moody’s determines that these or other events expose weaknesses in the bank’s risk management practices not presently incorporated in NBC’s bank financial strength rating.