The credit rating outlook for Canada's big banks remains negative heading into 2018 as policymakers are expected to adopt a new "bail-in" regime that would reduce the prospects of a taxpayer bailout for a failing Canadian bank, according to a new report from Moody's Investors Service Inc.
Once the details of the federal government's bail-in regime are finalized, the credit-rating agency's opinion will evolve, the report says. "While support is less likely, stand-alone credit drivers are mostly sound," notes David Beattie, senior vice president at Moody's, in a statement.
Indeed, the Moody's report notes that the credit-rating agency's baseline credit assessments for the Canadian banks remain among the highest in the world.
"The concentrated industry structure will help banks sustain market share, pricing power and profitability as well as strong recurring earnings from domestic banking franchises which will remain a primary credit strength," Beattie says.
However, the Moody's report also cautions that the banks do face the ongoing risk of high household debt levels and elevated housing markets, "which leave consumers, and bank asset quality, vulnerable to economic downturns or shocks."
"The strong asset quality of the banks has yet to be tested as household balance sheets and bank loan portfolios have not had to contend with a serious economic downturn," Beattie says. "Non-mortgage consumer loans are particularly vulnerable to shocks, and have higher loss-given-default than real estate secured debt."
Photo copyright: macfromlondon/123RF