Moody’s downgrades six Canadian banks over consumer debt exposure

Canadian Press | Jan 28, 2013 1:50 PM ET | Last Updated: Jan 28, 2013 3:58 PM ET
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Peter J. Thompson/National Post    The ratings affect Toronto-Dominion Bank, Scotiabank, Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank and the Desjardins caisse populaire.

 

TORONTO — Most of Canada’s biggest banks have been downgraded by the Moody’s rating agency, which believes they will be more vulnerable than in the past if there’s a major shock to the economy.

Theresa Tedesco: The two engines that have fuelled momentum during the global economic turmoil — consumer credit and residential mortgages — are stalling.

The latest downgrades Monday, which Moody’s Investor Services had warned were likely to happen, reflects the agency’s ongoing concern that Canadian household debt has risen to historical highs — putting pressure on the banks’ mortgage businesses.

The rating agency also said the banks face varying degrees of risk from their capital markets operations, which lend large amounts to corporations and help businesses raise money on the debt and stock markets.


The six financial institutions — five banks and a Quebec-based credit union — are being downgraded by one notch to a still relatively high rating of either double-A one, two or three.

“Following today’s actions, the Canadian banks still rank amongst the highest rated banks in our global rating universe,” Moody’s vice-president David Beattie said in the announcement.

The ratings affect Toronto-Dominion Bank (TSX:TD), Scotiabank (TSX:BNS), Bank of Montreal (TSX:BMO), Canadian Imperial Bank of Commerce, (TSX:CM), National Bank (TSX:NA) and the Desjardins caisse populaire.

TD is the highest rated of the six, at AA1 (down from AAA). Bank of Nova Scotia and Dejardins drop to AA2 (from AA1), CIBC, BMo and National slip to AA3 (from AA2).

A downgrade by a credit rating agency usually means investors will demand a higher interest rate when a company goes to raise cash by issuing bonds or other debt.

Last October, Moody’s warned it was placing the long-term ratings of those six banks under review for a possible downgrade.

The Wall Street Journal asks whether Moody’s has waited too long to cut its ratings on the banks, pointing out that while levels of consumer borrowing are still high the “most acute phase of the downside risk may already be over.”

Economic observers, including the Bank of Canada, have recently cited improvements in Canada’s consumer debt picture, with some arguing household debt growth “may finally have started to crest”, the Journal says.

Royal Bank was not included on Monday’s list.

Moody’s had already cut Royal Bank’s long-term deposit rating to Aa3 from Aa1 in June as part of a move to cut the credit ratings of 15 of the world’s largest banks, including Bank of America, JPMorgan Chase, Citigroup and Goldman Sachs.

Read an excerpt from the Moody’s statement below:

Toronto, January 28, 2013 — Moody’s Investors Service today downgraded the long-term ratings of six Canadian banks concluding the review initiated on 26 October 2012. The long-term senior debt ratings of the banks were all downgraded by 1 notch. We also removed systemic support from the ratings of all rated Canadian banks’ subordinated debt instruments, including those issued by Royal Bank of Canada (RBC). RBC’s other ratings were affirmed. The short term Prime-1 ratings of the Canadian banks were affirmed. All ratings for these banks now have a stable outlook. Moody’s special comment “Key drivers of Canadian bank rating actions” provides additional commentary on the rationale behind today’s actions. “Today’s downgrade of the Canadian banks reflects our ongoing concerns that Canadian banks’ exposure to the increasingly indebted Canadian consumer and elevated housing prices leaves them more vulnerable to unpredictable downside risks facing the Canadian economy than in the past.” said David Beattie, a Moody’s Vice President. “Following today’s actions, the Canadian banks still rank amongst the highest rated banks in our global rating universe.”
OVERVIEW OF TODAY’S ACTIONS
Bank of Montreal (BMO; downgraded to Aa3 stable from Aa2 for long-term deposits)
Bank of Nova Scotia (BNS; downgraded to Aa2 stable from Aa1 for long-term deposits)
Caisse centrale Desjardins (CcD; downgraded to Aa2 stable from Aa1 for long-term deposits)
Canadian Imperial Bank of Commerce (CIBC; downgraded to Aa3 stable from Aa2 for long-term deposits)
National Bank of Canada (NBC; downgraded to Aa3 stable from Aa2 for long-term deposits)
Toronto-Dominion Bank (TD; downgraded to Aa1 stable from Aaa for long-term deposits)
SUMMARY RATINGS RATIONALE
High levels of consumer indebtedness and elevated housing prices leave Canadian banks more vulnerable than in the past to downside risks the Canadian economy faces:
By 30 September 2012, Canadian household debt to personal disposable income reached a record 165%, up from 137% as of 30 June 2007, as debt grew faster than personal incomes. Growth in consumer debt has been driven by rising house prices, which have increased by approximately 20% since November 2007.
Downside risks to the Canadian economy have increased:
Moody’s central scenario for Canada’s gross domestic product (GDP) is for it to grow between 2% and 3% in 2013, but downside risks have increased. The open, commodity-oriented economy is exposed to external macro-economic risks, which if they arise would have significant ramifications for the Canadian economy, and consequently its banks.
NBC, BMO and BNS have sizeable exposure to volatile capital markets businesses:
Moody’s believes that trading and investment banking activities expose financial firms to the risk of outsized losses and risk management and controls challenges, and leave them highly dependent on the confidence of investors, customers and counterparties.
Canadian banks’ have noteworthy reliance on wholesale funding:
The Canadian bank’s noteworthy reliance on confidence-sensitive wholesale funding, which is obscured by limited public disclosure, increases their vulnerability to financial markets turmoil.
Moody’s has removed systemic support from the ratings of all Canadian banks’ subordinated debt instruments that had benefited from support “uplift”:
The rating agency believes the global trend towards imposing losses on junior creditors in the context of future bank resolutions reduces the predictability of such support being provided to the sub-debt holders of the large Canadian banks given the Canadian regulators’ broad legislated resolution powers. The removal of support for subordinated debt is consistent with recent actions we’ve taken elsewhere, including in many European countries, reflecting the increased likelihood that sub-debt holders would be subject to burden sharing in the event support was required.

Read the full Moody’s statement here