Moody's Investors Service - the credit rating arm of
) - has put the long-term ratings of six major Canadian banks on
review for a possible one-notch downgrade. The potential rating
revision comes in the wake of a flagging economy, record-high
consumer debt, soaring housing prices as well as sizeable
exposure of banks to capital markets.
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Moody's will be reviewing the ratings of
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 - is also put on review for a likely
downgrade. However, the rating agency has affirmed the short-term
ratings of all these banks, including Caisse Central.
Moody's also placed the subordinate debt ratings of
Royal Bank of Canada
) for revisions, keeping all its other ratings affirmed. Earlier,
in June this year, Moody's had downgraded Royal Bank of Canada's
deposit rating to 'Aa3' from 'Aa1' as part of its strategy to cut
the credit ratings of nearly fifteen of the world's largest
Bank of America Corporation
JPMorgan Chase & Co
The Goldman Sachs Group, Inc.
As per Moody's, Canadian banks face a bunch of risks from
substantial increases in the nation's consumer debt over the last
few years. The household debt-to-income ratio came in at 163% in
the second quarter of 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. Home sales in September this
year dropped nearly 15% from a year ago due to stringent mortgage
lending rules and sluggish economy. Though Moody's estimates
Canadian Gross Domestic Product to grow in the range of 2%-3% for
2013, it is of the opinion that the potential downside risks to
the economy have increased significantly.
Further, external risks including slow recovery of the U.S.,
deepening Euro-Zone crisis and moderate growth in the emerging
markets 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 Canadian banking
biggies. These include the considerable exposure to volatile
capital markets, increased contribution from subsidiaries
threatening the creditworthiness and concentrated franchise
structure limiting profitability growth.
Rating Action by Standard & Poor's
In July, Standard & Poor's Ratings Services cut its outlook
from 'stable' to 'negative' on seven Canadian banks, over
concerns about shakily high housing prices and consumer debt
levels. The banks included Royal Bank of Canada, Toronto-Dominion
Bank, Bank of Nova Scotia, National Bank, Laurentian Bank of
Canada, Home Capital Group Inc. and Central 1 Credit Union.
S&P, on its part, affirmed the ratings of all these banks.
However, it maintained stable outlooks and reaffirmed ratings on
five other Canadian banks including Canadian Imperial Bank and
Bank of Montreal.
We believe that Moody's rationale for the possible downgrade is
well justified. Further, removal of the government 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 taxpayers' money.
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.