Moody's reviews 6 Canadian banks for downgrade

Bond rating company Moody's Investors Service today said it would review the long-term ratings of six Canadian banks with the possibility of downgrading their creditworthiness.

Moody's cited "concerns about high consumer debt levels and elevated housing prices" among its reasons, saying the banks are more vulnerable to a downturn in the Canadian economy than in the past.

The six include Bank of Montreal, Bank of Nova Scotia, Caisse Centrale Desjardins, Canadian Imperial Bank of Commerce, National Bank of Canada and Toronto-Dominion Bank.

The Bank of Montreal's current Moody's rating is Aa2, the Bank of Nova Scotia's is Aa1, Caisse Centrale Desjardins' is Aa1, the CIBC's Aa2, the National's Aa2 and the Toronto-Dominion's, Aaa (see chart).

This spring, the average ratio of household debt to personal disposable income reached a record 163 per cent, up from 137 per cent five years earlier.

Canadian house prices, Moody’s said, rose 21 per cent in the last five years.

A downgrade could result in higher borrowing costs for the banks, which would be passed on to consumers.

Short-term ratings unaffected

While Moody's said it was reviewing the long-term ratings, the agency affirmed its short term Prime-1 ratings on the six banks.

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 two per cent and three per 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.

Borrowers have been encouraged by record low interest rates.

On Tuesday, the Bank of Canada announced it was keeping its trendsetting policy interest rate at one per cent for the 17th consecutive time as economic growth continued to be tepid, but signalled once again that it was worried about Canadian household debt.

High debt levels have also prompted warnings from Finance Minister Jim Flaherty and even the International Monetary Fund

Ottawa has moved several times in the last few years to curb housing-related debt, stepping in to limit how long Canadians can take to pay back their mortgage debt.

In June, Flaherty set the limit for CMHC-insured mortgages at 25 years.