* Cites concerns on housing sector, economy, consumer debt
* Concerned with four banks' capital markets exposure
* RBC, which was downgraded in June, excluded
By Luciana Lopez and Cameron French
NEW YORK/TORONTO, Oct 26 Moody's Investors
Service warned on Friday it could cut its ratings on five top
Canadian banks on concerns about a softening economy and
volatile capital markets, a blow to a banking system named the
soundest in the world four years in a row.
But the outlook for the sector is no longer as rosy, Moody's
said, because of the risks presented by the macroeconomic
environment and a business mix that leans heavily on domestic
mortgages and other consumer lending.
Canadian consumer debt has risen to record highs in recent
months, a situation reminiscent of the United States before its
2008 housing crisis. The household debt-to-income ratio jumped
to 163.4 percent in the second quarter from 161.8 percent in the
first quarter, Statistics Canada said a week ago.
Meanwhile, Canada's housing market appears to be cooling
after several years of red-hot gains.
"Domestically, we're concerned about the high and increasing
levels of consumer indebtedness and elevated housing prices, and
we feel that they may tend to leave the Canadian banks more
vulnerable to downside risks to the economy than they have been
in the past," David Beattie, Moody's vice president and senior
credit officer, told Reuters.
The warning applies to long-term debt ratings for
Toronto-Dominion Bank, Bank of Nova Scotia,
Bank of Montreal, Canadian Imperial Bank of Commerce
and National Bank of Canada. It also applies to
Caisse Centrale Desjardins, Canada's largest association of
The ratings agency said any cuts would likely be only one
notch. The sector's ratings are still among the highest in the
"We continue to believe that the Canadian banks rank among
the strongest in the world, and this review is based on concerns
about system-wide and bank-specific risks that aren't fully
captured in their current ratings," said Beattie.
The only bank not put on credit watch on Friday was Royal
Bank of Canada, the country's largest. That's because
Moody's lowered RBC's ratings by two notches in June as part of
a review of 17 global banks.
Moody's did place RBC's supported subordinated debt ratings
on review for downgrade, while affirming its other ratings.
CAPITAL MARKETS EXPOSURE
Moody's also cited the sizable capital markets exposure of
Scotiabank, BMO, CIBC and National Bank as reasons for the
warning. Exposure to capital markets was the main reason behind
RBC's ratings cut earlier this year.
For TD, the highest-rated Canadian bank, Moody's cited
concern with its "less-strong" U.S. subsidiary. TD has about
1,300 branches in the United States, outnumbering its branch
count in Canada.
TD's long-term credit rating is currently Aaa, which is the
highest rating. Scotiabank and Desjardins are rated Aa1, the
next level down, while BMO, CIBC, and National Bank are rated
Desjardins was cited because of its more "concentrated"
franchise than its Canadian peers, which Moody's said leaves it
less flexibility to respond to profit pressures.
Desjardins has a dominant retail bank presence in the
province of Quebec, but lacks the geographic diversity and
business mix of the big banks.
Canada's banks, which had held up much better than their
peers during the global economic crisis, were named soundest in
the world for four straight years by the World Economic Forum.
The second major debt rating agency, Standard & Poor's, made
a similar move in July, putting RBC, TD, Scotiabank and National
Bank on "negative outlook" citing rising consumer debt and
elevated housing prices.
Shares of the Canadian banks did not appear to be affected
by the Moody's report, which was released about an hour before
markets closed on Friday.
Of the banks placed on review, only TD declined, slipping
0.1 percent to C$81.17 on the Toronto Stock Exchange.
CIBC would not comment on the review, while a TD spokesman
said the bank "continues to be well capitalized and remains one
of the safest and strongest banks in the world."
The other lenders did not immediately respond to a request