Moody’s knocks down Canadian banks

Credit rating agency Moody's downgraded the long-term outlooks of a handful of Canadian banks on concern about elevated housing prices and soaring consumer debt levels. But if stock action is anything to go by, the move largely went unnoticed.

The financial group on the S&P/TSX composite index strengthened slightly on Tuesday despite the downgrade as the impact of credit agency moves have become less hard-hitting following the global financial crisis, said Thomas Caldwell, chairman of Caldwell Financial.

"If I had to capsulate it, the word irrelevant would come to mind," said Caldwell. "It comes down to the ratings agencies don't have the credibility they used to have."

Caldwell added the Monday's downgrade is largely tied to the country's once-hot real estate market, which has shown signs of cooling and enjoys various measures to prevent against steep crashes. Market sentiment is also generally on an uptrend as investor focus on earnings, he said.

"Bull markets ignore bad news; bear markets ignore good news," he said.

Canada's economy and banking system fared better than many developed nations during the global economic crisis, but recent signs of economic weakness caused the Bank of Canada to cut its growth forecast.

Last week, the central bank cut its growth outlook and highlighted the need to push back the possibility of a rate hike due largely to a wider output gap, stabilizing household debt and muted inflation.

Indeed, the downgrade comes even as the Bank of Canada noted "beginnings of a more constructive evolution of imbalances in the household sector," it said in its policy statement.

The downgrade reflects ongoing concerns the "banks' exposure to the increasingly indebted Canadian consumer and elevated housing prices leaves them more vulnerable to unpredictable downside risks facing the Canadian economy than in the past," said David Beattie, a vice president at Moody's.

Canadians are accumulating debt at eye-popping levels, with household debt-to-personal disposable income reaching a record 165 per cent in the third quarter, up from 137 per cent in June 2007, Moody's said. Growth in consumer debt has been driven by rising house prices, which have increased by approximately 20 per cent since November 2007, it added.

Despite the move, Canada's banks are still among the world's most highly rated, added Beattie.

In a statement, Canadian Finance Minister Jim Flaherty said the financial sector is "sound and well regulated," and for five years in a row the country has been ranked the soundest in the world by the World Economic Forum.

"Our government has taken aggressive and proactive actions since 2008 to protect the Canadian housing market and curb personal debt. We will continue to monitor the housing market to ensure its long-term stability," said Flaherty.

TD Bank drops to Aa1 from Aaa for long-term deposits, while BMO, CIBC, and National Bank of Canada drop to Aa3 from Aa2. Scotiabank was downgraded to Aa2 from Aa1, and Caisse Centrale Desjardins drops to Aa2 from Aa1.

Royal Bank of Canada, the country's largest bank, was downgraded by Moody's last summer as part of a review of global banks. RBC lost its triple-A rating from the agency in December 2010.