Six Canadian Banks Cut by Moody’s on Consumers’ Debt Burden

Six of Canada’s largest banks had credit ratings downgraded by Moody’s Investors Service on concern that over-indebted consumers and high housing prices have left lenders vulnerable to potential losses on assets.

Toronto-Dominion Bank, Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada and Royal Bank of Canada had their long-term debt and deposit ratings lowered one level, Moody’s said Wednesday in a statement. It also cut its counterparty risk assessment for the firms, excluding Toronto-Dominion.

“Expanding levels of private-sector debt could weaken asset quality in the future,” David Beattie, a Moody’s senior vice president, said in the statement. “Continued growth in Canadian consumer debt and elevated housing prices leaves consumers, and Canadian banks, more vulnerable to downside risks facing the Canadian economy than in the past.”

A run on deposits at alternative mortgage lender Home Capital Group Inc. has sparked concern over a broader slowdown in the nation’s real estate market, at a time when Canadians are taking on higher levels of household debt. The firm’s struggles have taken a toll on Canada’s biggest financial institutions, which have seen stocks slide on concern about contagion.

Untested Strength

In its statement, Moody’s pointed to ballooning private-sector debt that amounted to 185 percent of Canada’s gross domestic product at the end of last year. House prices have climbed despite efforts by policy makers to cool the market, it said. Prices in Toronto and Vancouver have soared on the backs of strong economies, limited supply and foreign demand that’s sparking some speculative buying in the two markets. Toronto prices jumped 25 percent in April from the year earlier.

“We do note that the Canadian banks maintain strong buffers in terms of capital and liquidity,” Moody’s said. “However, the resilience of household balance sheets, and consequently bank portfolios, to a serious economic downturn has not been tested at these levels of private sector indebtedness.”

Spokesmen for the six banks declined to comment or didn’t immediately respond to messages seeking comment outside of normal business hours.

Moody’s also cited high housing prices and consumer debt when it cut five of the banks in January of 2013. That decision cost Toronto-Dominion its Aaa grade.

The downgrades aren’t likely to have a big impact on bond prices, according to RBC Capital Markets.

“We do not believe small ratings changes cause meaningful long-term changes in spread levels in the Canadian banking sector, unless ratings cross certain thresholds,” such as from AA to A, Vivek Selot, a RBC Capital Markets analyst, said in a note Thursday.

The ratings company said that it still has a negative outlook on all six lenders. The move left Toronto-Dominion with a long-term debt rating of Aa2, the third-highest level. Moody’s lowered the other five to A1, the fifth-highest.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell