Posted: Sat Jul 28, 2012 8:47 pm Post subject: S&P cuts outlook on seven major Canadian banks
uh oh ...
S&P cuts outlook on seven major Canadian banks
Standard & Poor’s has cut its outlook to “negative” from “stable” on seven major Canadian financial institutions including Royal Bank of Canada, Toronto-Dominion Bank and Bank of Nova Scotia, attributing the change to soaring consumer debt levels and the increasingly fragile global economy.
“A prolonged run-up in housing prices and consumer indebtedness is… contributing to growing imbalances and Canada’s vulnerability to the generally weak global economy, applying negative pressure on economic risk for banks,” the ratings giant said.
The others involved in the revision include National Bank of Canada, the credit union system for Ontario and British Columbia known as Central 1 Credit Union, Laurentian Bank of Canada and Home Capital Group Inc.
S&P said in a statement after markets closed on Friday that the revised outlook recognizes the potential impact of a deteriorating economy on banks’ financial performance as well as capitalization.
Policy makers have issued repeated warnings in the last several years about the perilous state of Canadian household finances yet debt levels have continued to swell, primarily as a result of spending on residential mortgages.
While the domestic economy continues to grow and interest rates remain close to record low levels, most consumers can meet their debt obligations but as Bank of Canada Governor Mark Carney has pointed out, the high debt levels leave consumers — and the economy as a whole — vulnerable to shocks such a rise in interest rates or unemployment.
A lowered outlook does not necessarily result in a lowered debt rating but it does increase the probability of a downgrade.
The rating agency noted that Canadian lenders benefit from insurance provided by the Canada Mortgage and Housing Corp., a Crown corp that is covering default risk of nearly $600-billion of outstanding mortgage debt, more than half of the total.
“In our view, Canadian banks’ risk tolerances and risk management capabilities are generally strong and attuned to risks inherent in the Canadian consumer and housing sectors. Even so, we believe there is currently growing potential for deterioration of Canadian bank credit profiles associated with scenarios incorporating consumer sector stress.”
As I understand it, this amounts to a public warning to these institutions that they could be downgraded if they don't do something ... because, as S&P sees it, the world is heading into a world-wide depression. If so, it wouldn't take much for the ratios upon which S&P bases its ratings to change, in a negative direction.
This is the downside to those low mortgage rates, and the moral hazard presented by the backup provided by Central Mortgage and Housing.
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