Moody’s down­grades rat­ings for Canada’s big banks amid con­sumer debt wor­ries

Cape Breton Post - - Classifieds/ Business -

Moody’s In­vestors Ser­vice has down­graded Canada’s six big banks in another wor­ry­ing sign about grow­ing con­sumer debt and hous­ing prices.

The cut re­flects an on­go­ing con­cern that ex­pand­ing lev­els of pri­vate-sec­tor debt could weaken as­set qual­ity in the fu­ture, Moody’s se­nior vice-pres­i­dent David Beattie said.

“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,’’ Beattie said.

Shares of TD Bank (TSX:TD), Bank of Mon­treal (TSX:BMO), Sco­tia­bank (TSX:BNS), CIBC (TSX:CM), Na­tional Bank (TSX:NA) and Royal Bank (TSX:RY) all fell Thurs­day in the wake of the down­grade, which may in­crease their cost of bor­row­ing. Royal Bank closed down 58 cents at $92.75, while TD Bank dropped 47 cents to $63.42.

David Madani, se­nior Canada econ­o­mist at Cap­i­tal Eco­nomics, said the down­grade comes amid mount­ing con­cerns about the hous­ing mar­ket and its ef­fect on the econ­omy.

“Even the banks them­selves have ad­mit­ted re­cently that hous­ing is a prob­lem,’’ he said.

De­spite moves by the fed­eral gov­ern­ment in re­cent years to cool the hous­ing mar­ket, Moody’s noted that house prices and con­sumer debt lev­els re­main his­tor­i­cally high and busi­ness credit has also grown rapidly.

“We do note that the Cana­dian banks main­tain strong buf­fers in terms of cap­i­tal and liq­uid­ity,’’ the Moody’s re­port 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.’’

But Madani said the Cana­dian banks have taken steps to pro­tect them­selves even if there is a ma­jor hous­ing cor­rec­tion that leads to a broader eco­nomic slow­down.

“The thing to keep in mind though is when it comes to the ma­jor tra­di­tional larger banks, they’ve been very care­ful to in­sure a lot of their non-con­ven­tional mort­gages,’’ he said.

Madani said the Cana­dian banks would take a hit, but they have also ex­panded their op­er­a­tions out­side of the coun­try and di­ver­sify where they make their money in re­cent years.

Moody’s said it ex­pects the six big banks will face a more chal­leng­ing op­er­at­ing en­vi­ron­ment for the re­main­der of this year and be­yond.

The debt rat­ing agency down­graded the base­line credit as­sess­ments, the long-term debt and de­posit rat­ings and the coun­ter­party risk as­sess­ments of the banks and their af­fil­i­ates by one notch, with the ex­cep­tion of TD Bank’s counter party risk as­sess­ment which was af­firmed. It also main­tained its neg­a­tive out­look for the rel­e­vant rat­ings on the six banks.

The change cut TD Bank’s long-term rat­ing to Aa2, while the five other banks fell to A1.

The move comes amid height­ened scru­tiny of the Cana­dian hous­ing and fi­nan­cial sec­tor, par­tic­u­larly around al­ter­na­tive mort­gage lender Home Cap­i­tal, which was forced to seek an emer­gency $2-bil­lion line of credit re­cently as cus­tomers rushed to with­draw their de­posits from their high-in­ter­est sav­ings ac­counts.

Madani down­played the pos­si­bil­ity of trou­ble at Home Cap­i­tal caus­ing broader prob­lems in the sec­tor.

“They aren’t too big to fail, their bal­ance sheet is very small and lately we’ve al­ready seen some pri­vate lenders step up and pur­chase some of their pre­sum­ably bet­ter qual­ity mort­gages,’’ he said.

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