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Announcement:

Moody's places Canadian banks on review for downgrade

Global Credit Research - 26 Oct 2012

Toronto, October 26, 2012 -- Moody's Investors Service has placed the long-term ratings of six Canadian banks (including the bank financial strength ratings, all senior debt, junior subordinated debt, and preferred stock ratings) on review for downgrade. The short term Prime-1 ratings of the six banks are affirmed. Underpinning this review is Moody's view that these firms face challenges not fully captured in their current ratings. Moody's special comment "Concerns about high consumer debt levels and elevated housing prices, macro-economic risks, capital markets activities and bank-specific factors drive rating review of Canadian banks" (http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_146792) provides additional commentary on the rationale behind today's rating actions.

The banks placed on review today include:

Bank of Montreal (BMO; Aa2 review for downgrade; B-/a1 review for downgrade)

Bank of Nova Scotia (BNS; Aa1 review for downgrade; B /aa3 review for downgrade)

Caisse Centrale Desjardins (CCD; Aa1 review for downgrade; C+/a2 review for downgrade)

Canadian Imperial Bank of Commerce (CIBC; Aa2 review for downgrade; B-/a1 review for downgrade)

National Bank of Canada (NBC; Aa2 review for downgrade; B-/a1 review for downgrade)

Toronto-Dominion Bank (TD; Aaa review for downgrade; B+/aa2 review for downgrade)

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_146803

Following the review, the senior debt and deposit ratings for the six banks are expected to generally be no more than one notch lower than today.

During this review Moody's will also consider the removal of systemic support from the ratings of all seven Canadian banks' subordinated debt instruments that benefit from support. It is our view that the global trend towards imposing losses on junior creditors in the context of future bank resolutions may reduce the predictability of such support being provided to the sub-debt holders of the large Canadian banks. We currently incorporate two notches of systemic support into the subordinated debt ratings of the six banks outlined above as well as in Royal Bank of Canada (RBC; Aa3 Stable (m); C+/a2 Stable). All RBC ratings were affirmed (as they were addressed by our rating actions on Firms with Global Capital Markets Operations in June 2012) except for its supported subordinated debt ratings that have been placed on review for downgrade.

"Today's review of the Canadian banks reflects our concerns about high consumer debt levels and elevated housing prices which leave Canadian banks more vulnerable to increased risks to the Canadian economy, and for some banks a sizeable exposure to volatile capital markets businesses is of concern," said David Beattie, a Moody's Vice President. "Moody's recognizes the strong domestic franchises and solid earnings capacity of these large Canadian banks, and they will continue to rank among the highest-rated banks globally following this review."

RATINGS RATIONALE

High levels of consumer indebtedness and elevated housing prices leave Canadian banks more vulnerable to downside risks to the Canadian economy than in the past. By the second quarter of 2012, Canadian household debt to personal disposable income reached a record 163%, up from 137% in the second quarter of 2007, reflecting growth in debt that significantly outpaced personal incomes. Growth in consumer debt has been driven by rising house prices, which have increased by 21% since August 2007 (Source: Teranet-National Bank House Price Index).

Moody's central scenario for Canada's gross domestic product (GDP) is to grow between 2% and 3% in 2013, but downside risks have increased. The open, commodity-oriented economy is exposed to external risks, primarily (i) the weak US economic recovery (ii) the ongoing sovereign and banking crisis in the euro area; and (iii) a slowdown in emerging markets which weighs on commodity prices. Should these risks materialize, they would have significant ramifications for the Canadian economy that would be transmitted into the banking system.

Additionally, the large Canadian banks' noteworthy reliance on confidence-sensitive wholesale funding, which is obscured by limited public disclosure, increases their vulnerability to financial markets turmoil.

In addition to the macro-economic factors cited above, National Bank of Canada, Bank of Montreal, Bank of Nova Scotia and Canadian Imperial Bank of Commerce have sizable 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.

Toronto Dominion and Caisse Centrale Desjardins have other idiosyncratic factors that are additive to the macro-economic risks. Toronto Dominion's exceptionally robust creditworthiness may be weakened by the increasing contribution of its less-strong US subsidiary, while Caisse Centrale Desjardins' more concentrated franchise structure reduces the firm's flexibility to respond to profitability pressures.

Moody's has also attached a hybrid (hyb) indicator to the junior subordinated debt of Toronto-Dominion Bank.

Moody's research subscribers can access this report at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_146792.

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

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.

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 places Canadian banks on review for downgrade
No Related Data.

 

© 2014 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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© 2014 Moody's Investors Service, Inc., Moody’s Analytics, Inc. and/or their affiliates and licensors. All rights reserved.
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