From Moody’s this morning, the world’s safest banks all cop it in the neck on house prices:
WASHINGTON (MNI) – Moody’s Investors Service announced Monday downgrades for six Canadian banks by one notch, due to concerns about exposure to indebted consumers and high housing prices. All have a stable outlook. The text of the statement follows:
Toronto, January 28, 2013 — Moody’s Investors Service today downgraded the long-term ratings of six Canadian banks concluding the review initiated on 26 October 2012. The long-term senior debt ratings of the banks were all downgraded by 1 notch. We also removed systemic support from the ratings of all rated Canadian banks’ subordinated debt instruments, including those issued by Royal Bank of Canada (RBC). RBC’s other ratings were affirmed. The short term Prime-1 ratings of the Canadian banks were affirmed. All ratings for these banks now have a stable outlook. Moody’s special comment “Key drivers of Canadian bank rating actions” (http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_149485) provides additional commentary on the rationale behind today’s actions. “Today’s downgrade of the Canadian banks reflects our ongoing concerns that Canadian banks’ exposure to the increasingly indebted Canadian consumer and elevated housing prices leaves them more vulnerable to unpredictable downside risks facing the Canadian economy than in the past.” said David Beattie, a Moody’s Vice President. “Following today’s actions, the Canadian banks still rank amongst the highest rated banks in our global rating universe.”
OVERVIEW OF TODAY’S ACTIONS
Bank of Montreal (BMO; downgraded to Aa3 stable from Aa2 for long-term deposits)
Bank of Nova Scotia (BNS; downgraded to Aa2 stable from Aa1 for long-term deposits)
Caisse centrale Desjardins (CcD; downgraded to Aa2 stable from Aa1 for long-term deposits)
Canadian Imperial Bank of Commerce (CIBC; downgraded to Aa3 stable from Aa2 for long-term deposits)
National Bank of Canada (NBC; downgraded to Aa3 stable from Aa2 for long-term deposits)
Toronto-Dominion Bank (TD; downgraded to Aa1 stable from Aaa for long-term deposits)
Please click on the following link to access the full list of affected credit ratings. This list is an integral part of this press release and identifies each affected issuer: http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_149548
SUMMARY RATINGS RATIONALE
High levels of consumer indebtedness and elevated housing prices leave Canadian banks more vulnerable than in the past to downside risks the Canadian economy faces:
By 30 September 2012, Canadian household debt to personal disposable income reached a record 165%, up from 137% as of 30 June 2007, as debt grew faster than personal incomes. Growth in consumer debt has been driven by rising house prices, which have increased by approximately 20% since November 2007.
Downside risks to the Canadian economy have increased:
Moody’s central scenario for Canada’s gross domestic product (GDP) is for it to grow between 2% and 3% in 2013, but downside risks have increased. The open, commodity-oriented economy is exposed to external macro-economic risks, which if they arise would have significant ramifications for the Canadian economy, and consequently its banks.
NBC, BMO and BNS have sizeable 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.
Canadian banks’ have noteworthy reliance on wholesale funding:
The Canadian bank’s noteworthy reliance on confidence-sensitive wholesale funding, which is obscured by limited public disclosure, increases their vulnerability to financial markets turmoil.
Moody’s has removed systemic support from the ratings of all Canadian banks’ subordinated debt instruments that had benefited from support “uplift”:
The rating agency believes the global trend towards imposing losses on junior creditors in the context of future bank resolutions reduces the predictability of such support being provided to the sub-debt holders of the large Canadian banks given the Canadian regulators’ broad legislated resolution powers. The removal of support for subordinated debt is consistent with recent actions we’ve taken elsewhere, including in many European countries, reflecting the increased likelihood that sub-debt holders would be subject to burden sharing in the event support was required.
In short, promise to bail out everyone or be downgraded.
