The outlook for Canadian banks remains negative in 2016, reflecting the likelihood of reduced government support, Moody’s Investors Service said Monday.
In a new report, Moody’s said it expects that Canada’s government will formalize the details of a bank recovery and resolution framework and include the bail-in of creditors of systemically important institutions to reduce the public cost of bank failures. While the rating agency maintains very high government support assumptions for now, its outlook for the supported deposit and senior debt ratings of the country’s banks is negative.
“We expect the regulations governing Canada’s resolution framework will be clarified later this year following a consultative process, at which time we will refine our assessment of the framework’s implications for various creditor classes,” says David Beattie, senior vice president at Moody’s, in a statement.
The rating agency also notes that it expects a “modest deterioration” in the banks’ asset quality over the next 12 to 18 months, “as low oil prices continue to put financial stress on oil producers and consumers in affected provinces, dampening GDP growth.”
Historically low interest rates are continuing to drive up mortgage debt, Moody’s says, “increasing already highly leveraged Canadian consumers’ vulnerability to an economic downturn or a rise in rates.” Sound capital and liquidity levels would buffer the banks from unexpected losses in a stress scenario, Moody’s notes.
“Canadian banks benefit from a favorable domestic industry structure, hold significant pools of high-quality liquid assets and have resilient internal capital generation capabilities,” Beattie adds. “It is our view that any increase in credit costs will be mitigated by the banks’ solid capital and sound recurring earnings.”
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