Bank skyscrapers in downtown Toronto

A recent deal to cut credit card fees is credit negative for Canadian banks, says Moody’s Investors Service in report published Monday.

The Department of Finance Canada announced last week it had reached a voluntary agreement  with three major credit card companies — Visa Canada Corp., Mastercard Canada Inc., and Amex Bank of Canada — to lower average interchange fees to 1.4% from the current 1.5%.

Finance Canada projects that the agreement will reduce interchange revenue in Canada by $250 million a year on Canadian interchange revenue that Moody’s estimate totals $3.8 billion.

“Lower interchange fees are credit negative for Canadian banks because these fees contribute significantly to the very strong returns that the banks earn from their domestic personal and commercial banking operations,” the Moody’s report states. “Lower fees are also credit negative for credit card asset-backed securitizations (ABS) because of the reduction to yield and excess spread.”

Moody’s estimates the fee reduction “will have a relatively larger effect” on Royal Bank of Canada and Fédération des caisses Desjardins du Québec, “because they have the highest proportion of unsecured receivables relative to their domestic assets.”