Moody's cites soaring debt, home prices for downgrading Big 6 banks' credit ratings | CBC News (2024)

Pete Evans · CBC News

· Posted: May 11, 2017 8:30 AM EDT | Last Updated: May 12, 2017

Moody's says high debt levels and soaring house prices could be bad news for Canada's big banks, and has downgraded their credit rating as a result.

Toronto-Dominion Bank, Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canadaand Royal Bank of Canada all saw their credit ratings cut by one notch late Wednesday.

Moody's cited a "more challenging operating environment for banks in Canada for the remainder of 2017 and beyond."

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"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," Moody's vice-presidentDavidBeattie said.

High consumer debt a concern

"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."

Moody's noted Canada's record-high debt-to-income ratio of167 per cent as cause for concern, and said debt levels are now beyond the usual risk models in place to determine whether businesses could withstand a crisis.

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The ratings agency cited the same concerns in 2013, the last time it warned about the creditworthiness of the big banks.

Economist Derek Holt, who works at Scotiabank, said that downgrade didn't end up having much of an impact on the banks' business then, and he doubts it will this time.

'Plays to market sentiment'

"More thanfour years laterthe sky has not fallen on housing, the consumer or banks," Holt said. "I'm not sure how much new information is contained within this latest salvo but it certainly plays to market sentiment."

That's a reference to fears about Canada's housing market, which have come to the fore in recent weeks. Alternative lender Home Capital, which has seen its shares plummet amid an OSC investigation,is at the centre of the storm of concern over house prices, and the level of debt associated with them.

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"The market instinct is to treat it as contagion risk, but that risk is highly overblown in my opinion," Holt said.

Nonetheless, Moody's move is the ratings agency's way of saying they are becoming a bit more concerned about the banks' exposure to the housing market, but they're still confident in their businesses overall.

Finance professor Alan White of the Rotman School of Management in Toronto saidin an interview that Moody's move is likely just tied to current fears over house prices.

"As far as Iknow the banks' capital [levels] are fine so where's the problem?" he asked, rhetorically. "Potentially the real estate."

But White doesn't view Moody's move as some sort of canary in the coal mine for Canada's economy. Moody's "tweaking their rating," as he puts it,means they're a little concerned about the bank's exposure to an inflated housing market, but he said the average person shouldn't be.

Overabundance of caution?

Professor Marvin Ryder of the DeGroote School of Business in Hamiltonsays the downgrade is Moody's way of saying there is a slightly increased risk of problems spreading, in the unlikely eventthat large numbers of mortgages start going into default.

"Moody's is not going to wait for the problems," he told CBC News. "It is signalling now that it is worried."

But ultimately Ryder agrees that Moody's warning reflects an overabundance of caution.

"There is nothing the banks did to cause the downgrade, thus there is nothing they can do to reverse it," Ryder said. "The downgrade is totally due to external forces at play in Canada."

A downgraded credit rating incrementally increases the banks' cost of doing business, since they are seen as a slightly worse credit risk. The bankswill have to pay a bit more to borrow money, which eats into profitability.That means customers may eventually see higher interest rates or fees from banks looking to make up for lost profits.

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TD Bank was lowered to Aa2, while the other bigbanks were dropped to A1. Moody's highest credit rating grade is Aaa. According to Moody's, credit ratings that start with Aa are "high quality and are subject to very low credit risk." Ratings that start with just A are "upper-medium grade and are subject to low credit risk."

All of the banks are still at levels well above what's considered investment grade, and therefore still desirable for major institutional investors.

None of the banks cited in this story contacted by CBC News had any comment to provide.

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