S&P cuts outlook on 7 Canadian banks

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.