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Moody’s released the following announcement on Friday in connection with a review it is now conducting regarding the Canadian banking sector.
Moody’s Investors Service has placed the long-term ratings of six Canadian banks (including the bank financial strength ratings, all senior debt, junior subordinated debt, and preferred stock ratings) on review for downgrade. The short term Prime-1 ratings of the six banks are affirmed. Underpinning this review is Moody’s view that these firms face challenges not fully captured in their current ratings. Moody’s special comment “Concerns about high consumer debt levels and elevated housing prices, macro-economic risks, capital markets activities and bank-specific factors drive rating review of Canadian banks” () provides additional commentary on the rationale behind today’s rating actions.
The banks placed on review today include:
Bank of Montreal (BMO; Aa2 review for downgrade; B-/a1 review for downgrade)
Bank of Nova Scotia (BNS; Aa1 review for downgrade; B /aa3 review for downgrade)
Caisse Centrale Desjardins (CCD; Aa1 review for downgrade; C+/a2 review for downgrade)
Canadian Imperial Bank of Commerce (CIBC; Aa2 review for downgrade; B-/a1 review for downgrade)
National Bank of Canada (NBC; Aa2 review for downgrade; B-/a1 review for downgrade)
Toronto-Dominion Bank (TD; Aaa review for downgrade; B+/aa2 review for downgrade)
Following the review, the senior debt and deposit ratings for the six banks are expected to generally be no more than one notch lower than today.
During this review Moody’s will also consider the removal of systemic support from the ratings of all seven Canadian banks’ subordinated debt instruments that benefit from support. It is our view that the global trend towards imposing losses on junior creditors in the context of future bank resolutions may reduce the predictability of such support being provided to the sub-debt holders of the large Canadian banks. We currently incorporate two notches of systemic support into the subordinated debt ratings of the six banks outlined above as well as in Royal Bank of Canada (RBC; Aa3 Stable (m); C+/a2 Stable). All RBC ratings were affirmed (as they were addressed by our rating actions on Firms with Global Capital Markets Operations in June 2012) except for its supported subordinated debt ratings that have been placed on review for downgrade.
“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.”
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. By the second quarter of 2012, Canadian household debt to personal disposable income reached a record 163%, up from 137% in the second quarter of 2007, reflecting growth in debt that significantly outpaced personal incomes. Growth in consumer debt has been driven by rising house prices, which have increased by 21% since August 2007 (Source: Teranet-National Bank House Price Index).
Moody’s central scenario for Canada’s gross domestic product (GDP) is to grow between 2% and 3% in 2013, but downside risks have increased. The open, commodity-oriented economy is exposed to external risks, primarily (i) the weak US economic recovery (ii) the ongoing sovereign and banking crisis in the euro area; and (iii) 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.
Additionally, the large Canadian banks’ noteworthy reliance on confidence-sensitive wholesale funding, which is obscured by limited public disclosure, increases their vulnerability to financial markets turmoil.
In addition to the macro-economic factors cited above, National Bank of Canada, Bank of Montreal, Bank of Nova Scotia and Canadian Imperial Bank of Commerce have sizable exposure to volatile capital markets businesses. Moody’s believes that trading and investment banking activities expose 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.
Toronto Dominion and Caisse Centrale Desjardins have other idiosyncratic factors that are additive to the macro-economic risks. Toronto Dominion’s exceptionally robust creditworthiness may be weakened by the increasing contribution of its less-strong US subsidiary, while Caisse Centrale Desjardins’ more concentrated franchise structure reduces the firm’s flexibility to respond to profitability pressures.
Moody’s has also attached a hybrid (hyb) indicator to the junior subordinated debt of Toronto-Dominion Bank.
The principal methodology used in these ratings was Moody’s Consolidated Global Bank Rating Methodology published in June 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Moody’s places Canadian banks on review for downgrade
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Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.
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