Moody’s Downgrades Canadian Banks – “High levels of consumer indebtedness and elevated housing prices leave banks more vulnerable”

Posted on 29 January 2013 | 33 Comments

“Moody’s Investors Service has downgraded the long-term credit ratings of six Canadian banks, including Toronto-Dominion, Bank of Nova Scotia, Bank of Montreal and CIBC. National Bank and Desjardins were also downgraded. The ratings agency lowered each of its ratings one notch, citing high levels of consumer debt and high home prices as threats to the Canadian economy.
“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,” David Beattie, vice-president at Moody’s said in a note.
Canadian consumer debt has risen to a record-high 165 per cent of disposable income in the third quarter of 2012, up from 137 per cent in mid-2007. Bank of Canada governor Mark Carney has repeatedly warned about these levels, but they remain stubbornly high.”
– from ‘Moody’s downgrades 6 Canadian banks’, CBC, 28 Jan 2013 [hat-tip Bally]

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33 responses to “Moody’s Downgrades Canadian Banks – “High levels of consumer indebtedness and elevated housing prices leave banks more vulnerable””

  1. Kill all baby boomers | 29 January 2013 at 7:18 am | Reply

    I bet you 99% of the population has no idea what this means, nor why it even matters.

  2. JoeQ | 29 January 2013 at 7:39 am | Reply

    To be fair, it doesn’t mean that much. Rating agencies have pretty much lost all credibility after the financial crisis in 2008. Didn’t see anything coming and still have limited foresight.

    The fact that they cut almost all banks together at once indicates that they still have no feel for the dynamics of each bank’s internal strength. Simply saying “they are exposed to consumer debt” and cutting them all at once is kind of funny given that the profile of credit risk within each bank is hugely different.

    This post isn’t intended to gloss over the fact that some banks are looking quite weak right now. If Moody’s was doing their homework, they would look into who is accessing hundreds of millions in BOC repos lately as a last resort overnight financing mechanism.

    http://www.bankofcanada.ca/stats/bank_rate_html

    • Bally | 29 January 2013 at 9:32 am | Reply

      I don’t disagree regarding the perceived credibility of the rating agencies but I take the across-the-board downgrade as an expression of their (lack of) confidence in the Canadian housing market/economy as a whole. That is, because all the banks are exposed to Canadian consumer credit risk, and that risk is increasing, they all get a downgrade.

    • Real Estate Tsunami | 29 January 2013 at 9:45 am | Reply

      Joe,
      That’s exactly what scares me. After 30 years of working for an F.I., I found that regulators really have no understanding of how a modern F.I. operates. FICOMM and OSFI are supposed to be the watchdogs, but they are way over their heads and usually 2 steps behind.
      Even a plain vanilla derivative such as an interest rate swap is beyond the comprehension of most federal/provincial auditors.
      Therefore, I can understand why Moody’s are broad brushing the banks.
      Anyone who thinks that the Canadian banking system ( the envy of the world) is well regulated and supervised is naive, to say the least.

    • Farmer | 29 January 2013 at 11:16 am | Reply

      It means rates will rise. The agencies just tarred the biggest part of the Canadian financial system with some bad marks. It is a slap and a warning. That will be noticed elsewhere.

  3. zrh2yvr | 29 January 2013 at 7:44 am | Reply

    It will not affect much in the end but it should be noted that banks funding costs are driven by their credit rating. A small downgrade is not significant but ultimately, when downgrades become more significant, the cost of borrowing goes up and they have to either pass that on or make lower margins. This will impact the banks a small amount but really not much as in the short-term money market, you won’t get much of a spread difference for these two ratings.

    It is however the message that matters the most. I realize the agencies were not all that great in 2008 and prior but now they have to be a bit more straigh forward and make the downgrades when necessary.

  4. Nemesis | 29 January 2013 at 8:21 am | Reply

    Leaving aside, for the moment, the ‘DataGap’ as it relates to the BlackBoxes occasionally referred to as ‘banks’… there be other metrics which, thanks to a dearth of political will, are as sorely lacking…

    DearReaders, your TuesdayMorningZen and… Quote O’ TheDay!

    “Canada is a beautiful country. It is good for living, for higher education and it is not that populated.” – Mr. Zhang, owner of a steel business in Beijing, who ultimately bought a $2.2-million home in Oakville, ON because his 15-year-old daughter will be attending private school in Canada later this year [presumably without any help from any of our recently ‘shamed’ BlackBoxes]

    [G&M] – Crucial Bit of Missing Information May Be Driving Canadian Home Prices

    Canada’s housing market is a bubble about to burst in some cities, or in the midst of a soft landing. Either way, a crucial piece of information on just what’s driving the market is missing in action.

    Unlike in other countries such as the United States and Australia, neither the Canadian federal government nor industry keeps track of the numbers of foreign buyers or where they come from. Anecdotal evidence about foreign buyers abounds, yet hard evidence is lacking.

    http://tinyurl.com/apsldgq

    • Real Estate Tsunami | 29 January 2013 at 8:41 am | Reply

      Finally, the elephant in the room has been noticed.

    • The Poster Formerly Known As Anonymous | 29 January 2013 at 9:08 am | Reply

      Just the other day I was talking with a recent immigrant from China (elderly parent brought over with adult children who immigrated first). He was telling me that China is becoming unlivable due to the pollution in the air, the water, the land, and of course the food. He also had bad memories of unimaginable overcrowding.

      Many people who are in the position to do so want to leave, and who can blame them. You can be fairly sure the demand to immigrate here is vast.

      Whether the financial means and the absolute number that make it here amount to enough to “price out” the people already here earning a local income is a different question.

      • The Poster Formerly Known As Anonymous | 29 January 2013 at 9:12 am |

        (This demand is of course proportional to the speculative activity of non-residents, in anticipation of selling later to the incoming wealthy).

      • Naked Officials #9000 | 29 January 2013 at 12:59 pm |

        Que the racist intolerant bigotry of those who believe this concessionary zone belongs to Canadians! Such disharmony!

      • The Poster Formerly Known As Anonymous | 29 January 2013 at 7:07 pm |

        On a long enough timeline everyone will be a Canadian.

      • Airedales | 29 January 2013 at 7:14 pm |

        “(This demand is of course proportional to the speculative activity of non-residents, in anticipation of selling later to the incoming wealthy).”

        So true. Non-residents and residents alike. A mid-income couple I know have purchased three houses on the Westside over the past 10 years purely because they “know” there is an unlimited demand for Vancouver RE by HAM. Their strategy was well vetted and tested with family and friends back in the middle kingdom who apparently all dream of leaving.

        Interestingly, I worked with two individuals who each owned no less than 10 houses “because there is a never-ending demand from rich immigrants willing to buy at any price to satisfy their investor visa requirements.” I thought they were a bit crazy but it appears that they made the right call recognizing the tidal wave of money behind the small ebb and flow tide that I saw. Vancouver’s bubble still has legs with the increasing rate at which the Chinese wealthy are emigrating and the increasing rate at which locals are leaving for other provinces.

      • Naked Official #9000 | 30 January 2013 at 12:38 am |

        so when do we run that horrible red flag up on canada place and call it a day?

    • Nemesis | 30 January 2013 at 6:26 am | Reply

      DespairNot, NakedOfficial!!!

      CorrectThinking, pliant compradors will be rewarded with our best assignments!

      “You know how it is in China… For a young man who doesn’t earn very much, talking about love is unrealistic.” – Zhou Qihao, TaoBao RentBoy

      [G&M] – Chinese Women Take RentBoys Home For Holidays

      ….”For the equivalent of $65, Zhou Qihao will let a girl take him home. For an extra $3 or so an hour, he’ll let her take him to a movie – but it costs double if she wants to have dinner beforehand.

      Mr. Zhou is 24 years old, a bit taller than average at 1.78 metres, thin and “OK” looking (according to his online profile). Most of the year he works in home renovation, but with the Chinese New Year approaching – and all its attendant pressures on young women to show their parents and grandparents they’re getting closer to settling down and starting a family – he’s earning a little cash on the side as one of 260 “rental boyfriends” available on the China’s eBay-style direct-sales website, taobao…”…

      http://tinyurl.com/bx7xvga

      • Nemesis | 30 January 2013 at 6:39 am |

        Bad Comprador! No TaoBao RentBoy Holiday for you!

        [G&M] – HighRanking BC Liberal Probed for ‘Alleged’ Violation of Lobbying Rules

        …”The vice-president of the BC Liberal Party is under investigation for failing to register as a lobbyist before contacting provincial government officials, including Jobs Minister Pat Bell, on behalf of a controversial Chinese investor.

        The Office of the Registrar of Lobbyists in British Columbia said it is investigating whether Bill Belsey violated provincial lobbying regulations by working as an agent for Chinese businessman Ni Ritao and his companies, including Sun Wave Forest Products, the former owner of the Skeena Cellulose pulp mill in Prince Rupert.”…

        http://tinyurl.com/ab6yqab

      • rod_jonsson | 30 January 2013 at 9:09 am |

        “For a young man who doesn’t earn very much, talking about love is unrealistic.” … how dickensian … perhaps the punditry to permit a presumption on rent vs own …

  5. Cyril Tourneur | 29 January 2013 at 9:07 am | Reply

    “Citing high levels of consumer debt and high home prices as threats to the Canadian economy.”
    Those high home prices are kind of like Damocle’s sword aren’t they?

  6. Canayjun | 29 January 2013 at 11:10 am | Reply

    The stock markets (American and Canadian) don’t respond to fundamentals anymore. So Moody’s will have little or no impact on Canadian investors. It’s as if the stock markets in North America are now bullet proof because of QE infinity. Not sure this can last forever, especially in light of the current housing market correction.

  7. space889 | 29 January 2013 at 2:26 pm | Reply

    Prophet Garth has already pronouced this rating downgrade to be a non-event. All must follow in his infinite wisdom….
    :p

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