Moody’s Investors Service has put a small dent in RBC’s armour by downgrading the bank to an Aa1 rating.
RBC has been lauded as one of the big Canadian banks to survive the financial crisis relatively unscathed, but Moody’s is a little bit worried about the bank’s commitment to growing its capital markets business, “which potentially exposes bondholders to increased earnings volatility and poses significant risk management challenges,” the agency said. Follow Streetwise on Twitter: @StreetwiseBlog
"Shareholders and bank managers are attracted to the growth potential of capital markets businesses, but these businesses can expose bank bondholders to hidden tail risks," said Moody’s senior vice president Peter Nerby.
Before Moody’s took action, RBC was rated Aaa. But the downgrade isn’t too much of a shocker because Moody’s placed RBC on review for a possible downgrade earlier this fall.
RBC has announced a strategic target to maintain 25 to 30 per cent of earnings contributions from capital markets operations.
Despite the downgrade, Moody’s said RBC is in good financial shape because its other business, particularly personal and commercial banking, are working well and provide a buffer from the riskier capital-markets operation.
When RBC was put under review this fall, Moody’s confirmed Toronto-Dominion Bank’s long-term triple-A rating.