Moody's downgrades RBC on capital markets exposure

Mon Dec 13, 2010 12:29pm EST
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TORONTO (Reuters) - Moody's Investors Service has downgraded Royal Bank of Canada debt due to concerns that the bank's increased focus on capital markets business could leave it vulnerable to increased risk and volatility.

The U.S. debt-rating agency lowered RBC's deposit rating to Aa1 from Aaa, on Monday, and cut its unsupported bank financial strength to B from B+.

The move follows a warning by Moody's in September that it might cut the bank's deposit rating, and comes as RBC said it had acquired British boutique financial advisory group Loudon Capital Partners to bulk up its investment banking platform.

RBC has been pushing to expand its international capital markets and wealth management operations, and signaled last week that it may reduce its ambitions for U.S. retail banking. Retail banking is considered a low-risk business, although RBC's U.S. retail franchise has underperformed.

"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," Peter Nerby, a Moody's senior vice-president, said in a statement. Tail risk refers to the risk of volatile returns.

The agency said that potential volatility and the lack of visibility of a larger capital markets presence is not consistent with the higher ratings, but said it expects RBC's other businesses will provide a substantial buffer against the risks.

Canada's banks emerged from the financial crisis in a much stronger position than their European or U.S. counterparts, largely because of the strength of their domestic retail bank franchises.

As of the end of fiscal 2010 -- for Canada's banks, the fiscal year ends October 31 -- RBC's capital markets segment represented about 45 percent of its consolidated balance sheet, Moody's said.

Weak trading revenue has weighed on the year-over-year results from Canada's banks over the past two quarters.   Continued...