Moody's Downgrades Canadian Banks - Analyst Blog
January 29 2013 - 8:40AM
Zacks
Moody's Investors Service – the credit rating arm of
Moody's Corp. (MCO) – 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’.
Banks witnessing a one-notch downgrade include 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 – also
went down by one notch. The ratings of these six institutions now
range between Aa1 and Aa3.
Downgrade Rationale
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.
Our Viewpoint
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
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 MONTREAL (BMO): Free Stock Analysis Report
BANK OF NOVA SC (BNS): Free Stock Analysis Report
CDN IMPL BK (CM): Free Stock Analysis Report
MOODYS CORP (MCO): Free Stock Analysis Report
(NTIOF): ETF Research Reports
TORONTO DOM BNK (TD): Free Stock Analysis Report
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