Research

The credit rating agency expects a more challenging operating environment for Canadian banks in the months ahead

By James Langton |

 

As the federal government implements a regime to protect against taxpayer bailouts, the credit rating outlook for the big Canadian banks remains negative, says Moody's Investors Services in a report published Wednesday.

The credit rating agency's outlook for Canada's seven largest banks is negative, the report says, due to expectation that the banks are facing lower prospects for government support under the proposed new bail-in regime that is currently being finalized.

The Canadian government has introduced rules to enhance the powers of the Canadian Deposit Insurance Corp. to serve as the resolution authority for domestic systemically important financial institutions (D-SIFIs), the report notes, and to establish the Office of the Superintendent of Financial Institution's powers to impose requirements for D-SIFIs to maintain a minimum capacity to absorb losses when they are being wound up.

"We believe the new Canadian regime will maintain the critical services of the D-SIFIs, while imposing by statute explicit burden-sharing on eligible liability holders," says David Beattie, senior vice president at Moody's, in a statement.

In addition to the evolving regulatory environment, Moody's expects a more challenging operating environment for Canadian banks in the months ahead, which could erode the banks' asset quality and increase their sensitivity to external shocks. In particular, mortgage debt levels remain a key vulnerability to the Canadian banks, the report notes.

"Nonetheless, Canadian banks' overall asset quality remains superior to that of peer systems, as demonstrated by a very low level of problem loans," Beattie adds. "While banks are extending their lending into higher-risk non-mortgage lending, we do not expect an overall shift from their current very high underwriting standards."

The banks have solid capital levels and strong earnings, the report notes, which would buffer banks against unexpected losses in a stress scenario.

"Canadian banks system-wide capital levels are average by international standards, but are supplemented by the banks' strong internal capital generation," it says.

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