TORONTO (Reuters) - Bank of Nova Scotia (BNS.TO), one of Canada’s largest banks, took issue on Friday with Standard & Poor’s decision to cut its debt ratings, saying its international reach helps cushion it from a slowdown in Canadian lending.
S&P downgraded credit ratings on six Canadian financial institutions late on Thursday, a move that could raise their borrowing costs and crimp profit margins on the loans they make.
In addition to Scotiabank, Canada’s No. 3 lender, the credit rating agency lowered ratings on Caisse Centrale Desjardins, a Quebec-based federation of credit unions. Also cut were No. 6 bank National Bank of Canada (NA.TO), Montreal-based Laurentian Bank of Canada LB.TO, mortgage lender Home Capital Group (HCG.TO) and Vancouver-based Central 1 credit union.
The downgrade, which follows Moody’s Investors Service’s move in October to put five top Canadian banks on credit watch, is the latest sign of trouble for a banking industry widely considered the world’s soundest.
Like Moody‘s, S&P said it was concerned about high Canadian consumer debt and a vulnerable housing market, which has shown signs that it may be peaking, raising worries of a sharp reversal.
It also raised concerns that slowing profit growth could force the lenders to embrace riskier assets.
Scotiabank and Desjardins disagreed with the ratings agency’s assessment of risks.
“One of our key strengths is our broad diversification - by geography, product and customer. However, S&P’s methodology does not adequately recognize the benefits of this diversification,” Scotiabank spokeswoman Ann DeRabbie said in an e-mail.
Scotiabank has international operations in more than 50 countries, with a heavy focus on Latin America, the Caribbean, and Asia.
Louis-Daniel Gauvin, general manager of Caisse Central Desjardins, echoed Scotiabank’s statement.
“It’s a disappointment, because we feel our financial strength has certainly not changed.”
He said it was too early to tell if the move would raise the Caisse’s borrowing costs.
Canadians have continued to pile on debt in spite of government warnings that a sudden rise in interest rates could lead to mass defaults.
Statistics Canada said on Thursday that the ratio of credit market debt to disposable income rose to a record 164.6 percent in the third quarter from the previous record high of 163.3 percent.
Fears of slowing lending growth and the potential for a housing sector slump have prompted Canadian banks to warn in the most recent reporting period that slowing domestic loan growth will squeeze profit gains in 2013.
In a statement, S&P said the downgrades reflect expectations that a slowing economy could exacerbate competition for loans and deposits, and put pressure on bank margins and profitability.
“We also believe that Canadian finiancial institutions risk tolerances may increase to compensate for lower profitability by reaching for yield through investments, more aggressive lending in higher-yielding loans... or potentially a pick-up in merger and acquisitions activity,” S&P said.
The agency lowered its long- and short-term issuer credit ratings on the six institutions by one notch, but assigned a “stable” outlook to the companies.
Following the downgrade, Scotiabank and Desjardins’ long-term ratings are at A+, while National is at A-, Laurentian is at BBB, Home Capital is at BBB- and Central 1 is at A.
In July, S&P lowered its outlook to “negative” from “stable” on Scotiabank, National Bank, Laurentian, Credit 1, Home Capital, and two other banks.
National, Laurentian, and Home Capital did not respond to requests for comment.
The companies’ shares were little changed in Toronto Stock Exchange trading on Friday, as activity slowed ahead of Christmas holidays.
Reporting by Cameron French; Editing by Dan Grebler