Rating agency Moody’s Investors Service is reviewing the long-term ratings of six Canadian banks and cautioning the public that the financial institutions could be downgraded.
The six affected institutions are Bank of Montreal, Bank of Nova Scotia, Caisse Centrale Desjardins, Canadian Imperial Bank of Commerce, National Bank of Canada and Toronto-Dominion Bank.
Royal Bank of Canada is noticeably absent from the list; however, Moody’s already downgraded the bank two notches earlier this year.
The rating agency is now reviewing the other banks because they “face challenges not fully captured in their current ratings,” including concerns about consumer debt levels, housing prices, macro-economic risks and the weight of their capital markets divisions within their business mix.
Even if some of the banks are downgraded, Moody’s said the change is “expected to generally be no more than one notch lower than today.”
Earlier this year Moody’s downgraded a slew of global financial institutions, and RBC was the only Canadian bank affected. At that time, its debt rating fell to Aa3 from Aa1.
“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,” said David Beattie, a senior credit officer at Moody’s.
A downgrade by a credit rating agency usually means investors will demand a higher interest rate when a bank goes to raise cash by issuing bonds or other debt.
Both Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty have repeatedly warned Canadians about taking on too much debt.
Earlier this month, Statistics Canada released revised data showing that household market debt has risen to 163 per cent of disposable income, well above the 152 per cent previously reported using a less focused measure.
The housing market in Canada has also shown signs of cooling.
The Canadian Real Estate Association reported last week that despite a slight recovery from August, home sales in September fell 15.1 per cent from a year ago due to tighter mortgage lending rules and an uncertain economy.
Moody’s noted that its central scenario for Canada’s economy is for growth between 2 per cent and 3per cent next year, but the downside risks have increased.
The agency noted that a weak U.S. economic recovery, the ongoing crisis in Europe and a slowdown in emerging markets all weigh on commodity prices.
“Should these risks materialize, they would have significant ramifications for the Canadian economy that would be transmitted into the banking system,” Moody’s said.
In addition, the agency said National Bank, Bank of Montreal, Bank of Nova Scotia and CIBC have sizable exposure to the volatile capital markets businesses.
Moody’s said TD is also exposed to the U.S. market, while Caisse Centrale Desjardins’ concentrated franchise structure reduces its flexibility.
While Moody’s said it was reviewing the long-term ratings, the agency affirmed its short term Prime-1 ratings on the six banks.
In July, Standard & Poor’s Ratings Services revised its outlook from stable to negative on seven Canadian banks over concerns about unsustainably high home prices and consumer debt levels.
The debt-rating firm revised its outlook downward on Royal Bank, TD, Scotiabank , National Bank, Laurentian Bank, Home Capital Group Inc. and Central 1 Credit Union.
The credit rater, however, reaffirmed the credit ratings on all seven banks.
S&P also affirmed its ratings and maintained stable outlooks on five other Canadian banks including CIBC and Bank of Montreal.
With files from The Canadian Press