Canadian Banks Take a Credit Rating Hit from Moody’s

Canadian Banks Take a Credit Rating Hit from Moody’s

The credit ratings of Canada’s Big Six banks have been taken down a notch, reflecting our nation’s high level of household debt and housing prices.

Last week, credit ratings agency Moody’s Investor Service announced that Toronto-Dominion Bank, Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, and Royal Bank of Canada would all be subject to downgrading.

“Today’s downgrade of the Canadian banks reflects our ongoing concerns that expanding levels of private-sector debt could weaken asset quality in the future,” said David Beattie, a Moody’s senior vice-president, in the announcement.

“Continued growth in Canadian consumer debt and elevated housing prices leaves consumers, and Canadian banks, more vulnerable to downside risks facing the Canadian economy than in the past.”

The areas in which the six banks saw decreases in ratings were in Baseline Credit Assessments (BCAs) and long-term ratings, while all but TD bank also saw a decrease in Counterparty Risk Assessments (CRAs).

Déjà vu for banks in recent years

This is the second time in five years that household debt and elevated housing prices have affected Moody’s ratings of Canadian banks. The last was in January of 2013 when Moody’s had the same concerns.

In its most recent statement, Moody’s quoted that household debt is now at a record high with it being at 167.3% of disposal income as of the final quarter of 2016.

“Moody’s considers that weakening credit conditions in Canada — including an increase in private-sector debt to GDP to 185.0% as of the end of 2016, up from 179.3% for 2015 — present increasing risk to Canadian banks’ asset quality and profitability, ” said the company in its release.

Little concern for Canadian banks, for now

While this is certainly not good news for our banks, the downgrading was reported as more of a cautionary measure. For example, the Canadian banks are still well-financed and rank highly on a global level. As an added plus, we don’t face a rocky mortgage market like the U.S. did in past years.

Rather, the main concern comes down to the consumers’ ability to handle a possible downturn in the economy. If that were to happen, experts don’t know if the average person could still handle a high level of debt and high housing prices.

May also reflect problems in housing market

Some experts believe that this downgrade, instead, is a warning that the housing market bubble could burst, as discussed by Global News.

The announcement also came after news of troubles and dropping market shares in Home Capital Group Inc., an alternative lender.

The hot housing market is an issue that banks, as well as policy makers, are adjusting to and keeping their eyes on. Last year, Vancouver introduced the foreign buyers’ tax, while Ontario recently did the same, in initiatives to slow down the market.

How will this affect the consumer?

At the moment, this credit rating will have no direct impact on the consumer, but that’s not to say it won’t in the near future.

The down-grading could mean it will now cost more for Canadian banks to do business. And if banks have to pay more to borrow money, this will likely cut into their profits. As a result, consumers may see an increase in interest and fees at their local bank.

Later this month, it’s also expected that the Bank of Canada will raise interest rates, as a reaction to the high housing prices. The current concern is that keeping interest rates too low for too long will result in Canadians borrowing more money than they can afford in order to buy those expensive houses.

For now, this is a key time for Canadians to start planning for the future and consider a financial plan that will help them reduce their debt.

 

 

Related Topics

Economic News / RSM News

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