S&P Downgrade Outlook On Canadian Banks – “A prolonged run-up in housing prices and consumer indebtedness is contributing to growing imbalances, applying negative pressure on economic risk for banks.”

Ratings agency Standard & Poor’s has revised its outlook downwards on seven Canadian financial institutions, citing high housing prices and consumer debt.

“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.”

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.

– from ‘S&P cuts outlook on 7 Canadian banks’, G&M, 27 Jul 2012

7 responses to “S&P Downgrade Outlook On Canadian Banks – “A prolonged run-up in housing prices and consumer indebtedness is contributing to growing imbalances, applying negative pressure on economic risk for banks.”

  1. No downgrades yet, the ratings are still top of the pack. This is just an outlook negative.

  2. With Central 1 the concern I have had is with its regional focus: the vast majority of its loans are in BC and most in the LM and CRD. They practice limited disclosure on their loan portfolios and hedging techniques and their funding appears to be heavily focused on government programs that are now being scaled back somewhat.

    What will kill places like Central 1 and its subordinate credit unions is if their deposits take a hit in the same way US regionals got hit when loans went non-performing and deposits dwindled. I don’t know too much about it, other than there have been times in Canada’s past where trusts and credit unions have failed and have been absorbed into larger banks. TD became “TD Canada Trust” which was, long ago, a series of other trust companies like Guaranty Trust and others.

    A “really bad but plausible” scenario is seeing a few trust/CUs fail. For BC that would be a shame as they have been proactive at returning earnings to communities and granting depositors preferential deposit rates in lieu of shareholder equity and disbursements. But that’s the risk these regionals have always had, and it tragically seems like the deck was stacked against them. Of course the “really bad” may not occur but we should acknowledge it’s a possibility, especially if Asia hits a prolonged rough patch.

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