Moody's warns may downgrade five big Canadian banks

Fri Oct 26, 2012 6:28pm EDT
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By Luciana Lopez and Cameron French

NEW YORK/TORONTO (Reuters) - Moody's Investors Service warned on Friday it could cut its ratings on five top Canadian banks on concerns about a softening economy and volatile capital markets, a blow to a banking system named the soundest in the world four years in a row.

But the outlook for the sector is no longer as rosy, Moody's said, because of the risks presented by the macroeconomic environment and a business mix that leans heavily on domestic mortgages and other consumer lending.

Canadian consumer debt has risen to record highs in recent months, a situation reminiscent of the United States before its 2008 housing crisis. The household debt-to-income ratio jumped to 163.4 percent in the second quarter from 161.8 percent in the first quarter, Statistics Canada said a week ago.

Meanwhile, Canada's housing market appears to be cooling after several years of red-hot gains.

"Domestically, we're concerned about the high and increasing levels of consumer indebtedness and elevated housing prices, and we feel that they may tend to leave the Canadian banks more vulnerable to downside risks to the economy than they have been in the past," David Beattie, Moody's vice president and senior credit officer, told Reuters.

The warning applies to long-term debt ratings for Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada. It also applies to Caisse Centrale Desjardins, Canada's largest association of credit unions.

The ratings agency said any cuts would likely be only one notch. The sector's ratings are still among the highest in the world.

"We continue to believe that the Canadian banks rank among the strongest in the world, and this review is based on concerns about system-wide and bank-specific risks that aren't fully captured in their current ratings," said Beattie.   Continued...