Ratings agency Moody’s Investors Service lowered its outlook on Canada’s seven largest banks, in a move designed to reflect risks associated with the federal government’s previously announced ‘bail-in’ plan to prevent tax dollars from being used to bail out systemically important banks. While Moody’s affirmed the banks’ long-term ratings, it said the risk for its senior debt holders and uninsured depositors has “shifted to the downside.”
Under the bail-in system, certain bank debt can be converted to equity in the event of a crisis or if a bank becomes insolvent.
In an unrelated move, the ratings agency also lowered Bank of Nova Scotia’s B-bank financial strength rating outlook to negative from stable, citing the bank’s increased risk appetite as it seeks growth opportunities. The B-bank financial strength rating represents the credit rating of a bank separate from any government bailouts they might expect.
David Beattie, a vice-president at Moody’s, said “there are a number of developments over the past couple of months that signal an increase in risk appetite,” at Scotiabank, including increased exposure to consumer credit and auto finance portfolios and a divestment in CI financial, a stable source of income for the bank. Mr. Beattie added that despite the negative outlook change, Scotiabanks remains strong and, “These are just changes at the margins.”
Scotiabank set record profits in its core Canadian banking operations in May’s quarterly results. Flush with cash, the bank has sought acquisitions in South America and grown its consumer credit portfolio.
In early May, Scotiabank purchased 20 per cent of Canadian Tire’s financial services arm for $500-million, securing a relationship with Canada’s eighth largest credit card provider. Scotiabank is also looking to sell its $3.8-billion stake in wealth management firm CI Financial, which Moody’s worries might be used to pursue riskier international investments.
Moody’s outlook reports typically last 12-to-18 months.