Bond-rating agency Standard & Poor’s has downgraded six of Canada’s financial institutions, amid a softening economy and persistent low interest rates.
S&P said Thursday it was downgrading Bank of Nova Scotia, the country’s third-biggest bank, and National Bank of Canada, the sixth-largest lender, by one notch. The agency also lowered its ratings on Central 1 Credit Union, Caisse centrale Desjardins, Home Capital Group Inc. and Laurentian Bank of Canada by one grade.
It is the latest in a series of downgrades Canadian financial institutions have faced this year, as bond-rating agencies take a harder look at the slumping economy, high consumer debt, and low interest rates, which are expected to cause a slowdown in bank profitability in the coming year. Other agencies, such as DBRS and Moody’s have moved to downgrade their ratings of Canadian financial institutions by one notch in recent months.
“We believe that the Canadian banking sector is encountering incremental pressure from headwinds facing the Canadian economy,” S&P said in its ratings announcement. Those pressures are “heightening economic risk in the banking system. We also believe that industry risk for the Canadian banking sector is increasing. We expect that intensifying competition for loans and deposits will lead to pressure on profitability growth, especially in banks’ retail businesses.”
The Canadian banking sector just turned in a stellar year for profits, but profit growth in Canadian lending operations has started to slow, in part because of a government effort to cool off the housing market. Despite the downgrades, the ratings for Canadian banks remain among the highest in the world.
For example, S&P’s downgrade of Scotiabank moves the lender to A+, still one of the highest ratings possible. Scotiabank has not encountered a ratings downgrade in more than a decade. Other Canadian banks, including some that were downgraded this year by a notch, were reaffirmed at their current levels.