S&P cuts outlook on 7 Canadian banks

Tara Perkins – Financial Services
Reporter
The
Globe and Mail
Ratings agency
Standard & Poor’s has revised its outlook downwards on seven Canadian
financial institutions, citing high housing prices and consumer debt.

S&P affirmed
the ratings for Bank of Nova Scotia, Central 1 Credit Union, Home Capital Group
Inc., Laurentian Bank of Canada, National Bank of Canada, Royal Bank of Canada
and Toronto-Dominion Bank, but in each case it cut its outlook from stable to
negative.

“A prolonged
run-up in housing prices and consumer indebtedness in Canada is in our view
contributing to growing imbalances and Canada’s vulnerability to the generally
weak global economy, applying negative pressure on economic risk for banks,”
the rating agency stated in its decision. “Growing pressure on banks’ risk
appetites and profitability arising from competition for loan and deposit
market share could also lead to a deterioration in our view of industry risk.”

The dimming
prospects for the global economy added further impetus for the change, because
Canada could see unemployment rise, further constraining income growth. That,
in turn, could make it harder for Canadians to pay off their debts and amplify
the country’s vulnerability to a housing market correction at some point in the
future, the agency said.

The negative
outlook recognizes that Canadian banks could see their financial performance
and capital levels hurt by these factors, and could also suffer from stiffer
competition among one another for loans as consumers try to tackle their debt
loads.

House prices
have roughly doubled over the past decade while, relative to GDP, consumer debt
has risen from about 70 per cent to more than 90 per cent, S&P pointed out.
And it suggested that Ottawa’s actions have not done enough to stem what could
be a significant problem for the economy. “Successive government efforts since
2008 to counteract the stimulative effect of low interest rates on consumer
borrowing and home prices have done less than we expected to counteract the
growing level of consumer leverage and housing market risk in Canada,” S&P
said. The agency is now watching to see if the most recent moves that the
government has made will have better results.

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