Moody’s Investors Service, has placed the long-term ratings of six big Canadian financial institutions on review for downgrade amid worries about macroeconomic risks, including household indebtedness.
The rating agency said Friday that the review is based on its view that the banks face challenges not fully captured in their current ratings.
The banks under review include: Bank of Montreal (TSX:BMO); Bank of Nova Scotia (TSX:BNS); Caisse Centrale Desjardins; CIBC (TSX:CM); National Bank of Canada (TSX:NA) and Toronto-Dominion Bank (TSX:TD). They are expected to face no more than a one-notch downgrade.
The ratings of Royal Bank (TSX:RY) were already downgraded in June as part of Moody’s rating actions on firms with global capital markets operations back.
“Today’s review of the Canadian banks reflects our concerns about high consumer debt levels and elevated housing prices which leave Canadian banks more vulnerable to increased risks to the Canadian economy, and for some banks a sizeable exposure to volatile capital markets businesses is of concern,” said David Beattie, a Moody’s vice president. “Moody’s recognizes the strong domestic franchises and solid earnings capacity of these large Canadian banks, and they will continue to rank among the highest-rated banks globally following this review.”
Moody’s says that high levels of consumer indebtedness and elevated housing prices leave Canadian banks more vulnerable to downside risks to the Canadian economy than in the past. Its central scenario for Canada’s GDP is to grow between 2% and 3% in 2013, but downside risks have increased, Moody’s notes.
Apart from the domestic concerns, the Canadian economy is also exposed to external risks, Moody’s says, primarily the weak U.S. economic recovery; the ongoing sovereign and banking crisis in the euro area; and, a slowdown in emerging markets which weighs on commodity prices. “Should these risks materialize, they would have significant ramifications for the Canadian economy that would be transmitted into the banking system,” it says.
Additionally, it says that the large Canadian banks’ reliance on “confidence-sensitive wholesale funding, which is obscured by limited public disclosure, increases their vulnerability to financial markets turmoil.”
Apart from the macro factors, Moody’s also notes that BMO, Scotia, CIBC and National Bank have sizable exposure to volatile capital markets businesses, which it believes exposes financial firms to the risk of outsized losses and risk management and controls challenges, and leave them highly dependent on the confidence of investors, customers and counterparties.
TD and Desjardins have other idiosyncratic factors in addition to the macro risks too, it notes, including TD’s increasing contribution from its less-strong U.S. subsidiary; and, Desjardins’ concentrated franchise structure, which reduces the firm’s flexibility to respond to profitability pressures.
The review will also consider the removal of systemic support from the ratings of all seven firms’ subordinated debt instruments, which reflects a global trend towards imposing losses on junior creditors in the event of possible bank failures.