Moody's Investors Service - the credit rating arm of
) - has downgraded the long-term ratings of six major Canadian
banks, concluding the review initiated in Oct 2012. However, the
outlook for these banks has been maintained at 'Stable'.
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Banks witnessing a one-notch downgrade include
Bank of Montreal
The Bank Of Nova Scotia
Canadian Imperial Bank of Commerce
National Bank of Canada
The Toronto-Dominion Bank
). The rating of Canada's largest association of credit unions -
Caisse Centrale Desjardins - also went down by one notch. The
ratings of these six institutions now range between Aa1 and Aa3.
As per Moody's, Canadian banks face a bunch of risks owing to the
substantial increases in the nation's consumer debt over the last
few years. The household debt-to-income ratio came in at 165% at
the end of Sep 30, 2012, up from 137% in the second quarter of
2007. This reflects the rising disparity between the growth in
debt and hike in personal incomes.
Another contributor to the escalating consumer debt is the
substantial rise in housing prices. There has been a 20% hike in
housing prices since Nov 2007. According to the rating agency,
although Canadian Gross Domestic Product will likely grow in the
range of 2%-3% in 2013, the potential downside risks to the
economy have increased manifold.
Further, unsettling macro economic factors will weigh down on the
commodity markets with severe ramifications on the overall
Canadian economy, which will consequently engulf the nation's
entire banking system.
In addition to the abovementioned macro economic factors, there
are certain other bank-specific factors taken into consideration
by Moody's to assess the ratings of these banking biggies. Such
factors include the considerable exposure to volatile capital
markets and significant dependence on wholesale funding.
Rating Action by Standard & Poor's
In Dec 2012, Standard & Poor's Ratings Services downgraded
the ratings of six Canadian financial institutions namely
Scotiabank, National Bank of Canada, The Laurentian Bank of
Canada, Central 1 Credit Union, Caisse Centrale Desjardins and
Home Capital Group by a notch. The downgrades came on the back of
a sluggish economy, low interest rate environment and problems
faced by the Canadian economy.
The removal of government's support from the ratings of the
subordinate debt of some institutions will force the debt holders
to bear the brunt in case of losses, thereby keeping safe the
However, it must be mentioned that these aforementioned Canadian
banks have been performing better than their global peers for the
last couple of years. The strong fundamentals and franchise
structures of these banks are expected to absorb the ill effects
of the rating downgrades.