Toronto, January 28, 2013 -- Moody's Investors Service today downgraded the long-term ratings
of six Canadian banks concluding the review initiated on 26 October 2012.
The long-term senior debt ratings of the banks were all downgraded
by 1 notch. We also removed systemic support from the ratings of
all rated Canadian banks' subordinated debt instruments, including
those issued by Royal Bank of Canada (RBC). RBC's other ratings
were affirmed. The short term Prime-1 ratings of the Canadian
banks were affirmed. All ratings for these banks now have a stable
outlook. Moody's special comment "Key drivers of Canadian
bank rating actions" (http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_149485)
provides additional commentary on the rationale behind today's actions.
"Today's downgrade of the Canadian banks reflects our ongoing concerns
that Canadian banks' exposure to the increasingly indebted Canadian
consumer and elevated housing prices leaves them more vulnerable to unpredictable
downside risks facing the Canadian economy than in the past."
said David Beattie, a Moody's Vice President. "Following
today's actions, the Canadian banks still rank amongst the
highest rated banks in our global rating universe."
OVERVIEW OF TODAY'S ACTIONS
Bank of Montreal (BMO; downgraded to Aa3 stable from Aa2 for long-term
deposits)
Bank of Nova Scotia (BNS; downgraded to Aa2 stable from Aa1 for long-term
deposits)
Caisse centrale Desjardins (CcD; downgraded to Aa2 stable from Aa1
for long-term deposits)
Canadian Imperial Bank of Commerce (CIBC; downgraded to Aa3 stable
from Aa2 for long-term deposits)
National Bank of Canada (NBC; downgraded to Aa3 stable from Aa2 for
long-term deposits)
Toronto-Dominion Bank (TD; downgraded to Aa1 stable from Aaa
for long-term deposits)
Please click on the following link to access the full list of affected
credit ratings. This list is an integral part of this press release
and identifies each affected issuer: http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_149548
SUMMARY RATINGS RATIONALE
High levels of consumer indebtedness and elevated housing prices leave
Canadian banks more vulnerable than in the past to downside risks the
Canadian economy faces:
By 30 September 2012, Canadian household debt to personal disposable
income reached a record 165%, up from 137% as of 30
June 2007, as debt grew faster than personal incomes. Growth
in consumer debt has been driven by rising house prices, which have
increased by approximately 20% since November 2007.
Downside risks to the Canadian economy have increased:
Moody's central scenario for Canada's gross domestic product
(GDP) is for it to grow between 2% and 3% in 2013,
but downside risks have increased. The open, commodity-oriented
economy is exposed to external macro-economic risks, which
if they arise would have significant ramifications for the Canadian economy,
and consequently its banks.
NBC, BMO and BNS have sizeable exposure to volatile capital markets
businesses:
Moody's believes that trading and investment banking activities
expose financial firms to the risk of outsized losses and risk management
and controls challenges, and leave them highly dependent on the
confidence of investors, customers and counterparties.
Canadian banks' have noteworthy reliance on wholesale funding:
The Canadian bank's noteworthy reliance on confidence-sensitive
wholesale funding, which is obscured by limited public disclosure,
increases their vulnerability to financial markets turmoil.
Moody's has removed systemic support from the ratings of all Canadian
banks' subordinated debt instruments that had benefited from support
"uplift":
The rating agency believes the global trend towards imposing losses on
junior creditors in the context of future bank resolutions reduces the
predictability of such support being provided to the sub-debt holders
of the large Canadian banks given the Canadian regulators' broad
legislated resolution powers. The removal of support for subordinated
debt is consistent with recent actions we've taken elsewhere,
including in many European countries, reflecting the increased likelihood
that sub-debt holders would be subject to burden sharing in the
event support was required.
SUMMARY OF BANK SPECIFIC RATING RATIONALE (listed alphabetically)
Bank of Montreal (BMO; Aa3 stable; C+/a2 stable)
Reflecting the smaller size of its Canadian residential mortgage business
relative to peers, BMO has a high proportionate exposure to unsecured
and non-real estate secured consumer loans, (20% of
total Canadian consumer loans at 31 October 2012) which Moody's
views as the debt category most likely to give rise to sizeable incremental
loss experience in the event of a sharp system-wide economic shock.
In addition, BMO's capital markets earnings contribution is
the second highest in the peer group (25% at 31 October 2012) and
BMO has significant growth aspirations for its US mid-cap corporate
and investment banking initiative which may increase its reliance on inherently
less stable capital markets earnings going forward.
The downgrade of BMO also resulted in a downgrade of its rated US subsidiaries,
whose ratings benefit from Moody's expectation of support for them from
BMO. Specifically, BMO Financial Corp.'s issuer
rating was lowered to A3 from A2 and the long-term deposit rating
of BMO Harris Bank, N.A., was lowered to A2
from A1. Moody's standalone bank financial strength rating/baseline
credit assessment of C/a3 on BMO Harris Bank, N.A.,
as well as its Prime-1 short-term rating, were affirmed.
Bank of Nova Scotia (BNS; Aa2 stable; B-/a1 stable)
BNS has the most diversified earnings profile of the peer group at the
business segment level and arguably the most line of business diversification
within those segments, given the numerous geographies in its international
division and its diversified capital markets lines of business.
BNS has low historical earnings volatility evidencing the consistent quality
of execution against its diversification strategies. That being
said, it has mid-peer group levels of proportionate exposure
to less well secured Canadian consumer debt relative to peers.
BNS is also more reliant upon confidence sensitive wholesale funding than
its peers, a consideration which weighs on its credit profile.
The downgrade of BNS also resulted in a downgrade of ING Bank of Canada,
a domestic subsidiary that BNS acquired in November 2012, as a result
of the parental support incorporated in ING Bank of Canada's ratings.
Specifically, ING Bank of Canada's long-term deposit
rating was lowered to Aa3 from Aa2 and the subordinated debt rating was
lowered to A2 from Aa3. Moody's standalone bank financial
strength rating/baseline credit assessment of C-/baa1 (negative
outlook) on ING Bank of Canada, as well as its Prime-1 short-term
rating, were affirmed.
Canadian Imperial Bank of Commerce (CIBC; Aa3 stable; C+/a2
stable)
CIBC is the most reliant of the Canadian banks on domestic P&C earnings,
which generated 71% of earnings in 2012. In the event of
a sharp system-wide economic shock, or a prolonged period
of low growth and low interest rates, CIBC has only modest "shock
absorbers" in the form of diversified earnings to offset earnings
erosion and/or capital charges attributable to increased Canadian consumer
loan losses. Our review of CIBC's capital markets growth
aspirations has left us less concerned that the bank might return to its
previous high reliance on inherently less stable capital markets earnings.
Caisse Centrale Desjardins (CcD; Aa2 stable; C/a3 stable)
Among the peer group, Desjardins has the second highest exposure
to Canadian consumer credit after CIBC. At December 31, 2011,
loans to individuals represented 78% of gross loans. This
is offset in part by the group's bias towards residential mortgage
lending (82% of total consumer loans) and the diversification benefit
from insurance operations. While unsecured consumer credit is a
relatively small proportion of total consumer assets, Desjardins'
retail concentration means that non-real estate secured consumer
credit exposure is still relatively high as a proportion of Tier 1 capital
at 146%. We highlight that Desjardins' concentration
in Québec is in this instance an advantage because it means that
the group's exposure to the riskiest property markets (Vancouver
and Toronto) is very low. While household debt to income is lower
in Québec than the rest of Canada (partly because the province
has a lower level of home ownership), leverage has increased,
leaving consumers exposed to external macro-economic shocks.
As an export-oriented economy, Québec shares similar
exposures to external economic events as Canada as a whole.
National Bank of Canada (NBC; Aa3 stable; C/a3 stable)
NBC is the Canadian bank most reliant upon inherently less stable capital
markets earnings, which generated 32% of total earnings in
2012. Within capital markets, NBC's franchise is heavily
oriented towards three concentrations; (1) equity derivatives,
(2) fixed income (NBC is the leading underwriter of Canadian government
debt despite its limited size) and, (3) Quebec investment banking.
Reflecting this exposure, NBC also has the highest pre-tax
earnings volatility among peers (excepting only CIBC), measured
over a five year period since 2007. NBC maintains a relatively
large trading inventory ($44.5 billion) which is required
to support a trading business concentrated in fixed income. In
addition, NBC is also at the high end of the peer group in terms
of concentrations in unsecured and non-real estate secured Canadian
consumer loans as a proportion of their Canadian consumer loans,
at approximately 20% at 31 October 2012, which will give
rise to the highest levels of incremental loan losses in a stress scenario.
Toronto Dominion Bank (TD; Aa1 stable; B/ aa3 stable)
TD has the lowest exposure to the capital markets earnings of the peer
group (other than CcD), only medium reliance upon Canadian P&C
earnings (50% in full-year 2012) and a low concentration
in less well secured consumer loans. However, the increasing
proportion of earnings contributed by its less well positioned US subsidiary
to the group's overall earnings and risk profile is the overriding
driver behind today's rating actions for this bank.
With regard to its US subsidiary, Moody's downgraded the standalone
bank financial strength rating/baseline credit assessment of TD Bank,
N.A. to C+/a2 from B-/a1. The downgrade
reflects the challenges that stem from parent TD's growth ambitions in
US commercial and retail banking. To achieve its parent's
objectives, TD Bank, N.A. continues to expand
its business at an above-average rate, which poses risks
for creditors. Moreover, as a frequent acquirer in the US,
TD has displayed a willingness to reintroduce integration risk on a periodic
basis.
Nonetheless, Moody's acknowledges that TD has been successful
in creating a diverse US banking franchise. However, that
franchise is less profitable than those of many higher-rated US
regional banks and the expenses associated with its continued growth,
including ongoing de novo branch expansion, will remain significant
going forward.
TD Bank, N.A.'s long-term deposit rating,
which continues to benefit from Moody's expectation of support from
parent TD, was downgraded to Aa3 from Aa2. However,
the A1 issuer rating of TD Bank, N.A.'s immediate
parent, TD Bank US Holding Company, was confirmed.
This reflects its growing capital base and declining double leverage,
trends that the rating agency expects will continue.
The principal methodology used in these ratings was Moody's Consolidated
Global Bank Rating Methodology published in June 2012. Please see
the Credit Policy page on www.moodys.com for a copy of this
methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The below contact information is provided for information purposes only.
Please see the ratings tab of the issuer page at www.moodys.com,
for each of the ratings covered, Moody's disclosures on the
lead analyst and the Moody's legal entity that has issued the ratings.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
David Beattie
VP - Senior Credit Officer
Financial Institutions Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635
Robert?Franklyn?Young
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635
Moody's downgrades Canadian banks
