Moody's May Downgrade Canadian Banks - Analyst Blog
October 29 2012 - 12:10PM
Zacks
Moody's Investors Service – the credit rating arm of
Moody's Corp. (MCO) – 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.
Moody’s will be reviewing the ratings of Bank of
Montreal (BMO), The Bank Of Nova Scotia
(BNS), Canadian Imperial Bank of Commerce (CM),
National Bank of Canada (NTIOF), and The
Toronto-Dominion Bank (TD). 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 (RY) 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 banks, including Bank of
America Corporation (BAC), JPMorgan Chase &
Co. (JPM) Citigroup, Inc. (C) and
The Goldman Sachs Group, Inc. (GS)
Downgrade Rationale
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.
Our Take
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.
BANK OF AMER CP (BAC): Free Stock Analysis Report
BANK MONTREAL (BMO): Free Stock Analysis Report
BANK OF NOVA SC (BNS): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
CDN IMPL BK (CM): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
MOODYS CORP (MCO): Free Stock Analysis Report
(NTIOF): ETF Research Reports
ROYAL BANK CDA (RY): Free Stock Analysis Report
TORONTO DOM BNK (TD): Free Stock Analysis Report
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