The outlook for the Canadian banking system is stable, but household debt remains a concern, says Moody’s Investors Service in a new report.
The rating agency said Thursday that its outlook for the Canadian bank sector remains stable, as the big banks continue to benefit from an industry structure that creates significant barriers to entry in their most profitable businesses. “The major Canadian banks benefit from sustainable double-digit market shares across all significant retail and commercial financial services and products,” said Moody’s vice president & senior credit officer, David Beattie. “This provides them with scale and recurring earnings power in their home market, as well as significant efficiency advantages.”
Moody’s says that the banks’ domestic retail and commercial franchises are very profitable, “primarily owing to low-risk activities centered on the banks’ residential mortgage platforms.” Additionally, their asset quality and capital level, are good, particularly compared with banking systems in other countries.
However, it also cautions that high household debt, elevated housing prices, and the impact of banks’ diversification strategies represent downside risks to the stability of the Canadian banking system. “Overleveraged Canadian consumers are more vulnerable to an economic downturn and a rise in interest rates,” it says, adding that this was a factor in Moody’s downgrade of the Canadian banks in January.
Moody’s also notes that its ratings on the banks’ senior debt continues to assume that they would receive government support, if needed; although it withdrew that assumption for subordinated debt ratings earlier this year.
“A new bail-in regime for senior debt is under active consideration by policymakers,” it notes, but it says it “does not yet have sufficient information about the government’s intentions around existing senior debt to modify its assessment of support for these securities.” It will review that stance as the regime becomes more defined, it says.