Moody's keep Canada banks on 'negative' outlook

Mon Jul 11, 2016 7:00am EDT
 
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TORONTO, July 11 (Reuters) - Canadian banks remain on a "negative" outlook, ratings agency Moody's said on Monday, citing a likely reduction in government support following the introduction of laws shifting some of the responsibility for propping up failing lenders to creditors.

Moody's has had a negative outlook on Canadian banks since July 2014.

Canada said in March it would allow authorities to convert eligible long-term debt of a failing lender into common shares in order to recapitalize the bank.

The plan is in line with international efforts to address the potential risks to the financial system from institutions that are deemed too big to fail and reduce the need for costly taxpayer-funded bailouts. It also means banks that hit trouble may not be able to rely on the same level of government support in the future, potentially making them more risky investments.

Moody's also said on Monday that it expected a modest deterioration in the quality of banks' lending, reflecting rising losses from loans to oil and gas firms and weak economic growth and higher unemployment in oil-producing provinces.

However, it said any increase in credit costs will be offset by the banks' solid capital positions and profitability.

Moody's also cited rising house prices and high household debt, which it said created vulnerability to increased unemployment or a rise in interest rates.

Canada's banking regulator said on Thursday it is tightening oversight of mortgage lending, citing concerns about record household debt and a sharp jump in house prices.

(Reporting by Matt Scuffham; Editing by Leslie Adler)