-- We believe that the Canadian banking sector is
encountering incremental pressure from headwinds facing the
Canadian economy, which is heightening economic risk in the
-- We also believe industry risk for the Canadian banking
sector is increasing. We expect that intensifying competition
for loans and deposits will lead to pressure on profitability
growth, especially in banks' retail businesses.
-- We are lowering our long- and short-term issuer credit
ratings on National Bank of Canada to 'A-/A-2' from 'A/A-1',
following our revision of the stand-alone credit profile on the
bank to 'a-' from 'a'. The outlook is stable.
-- The stable outlook reflects our expectation that National
Bank of Canada's credit fundamentals will remain consistent with
current ratings over the next 24 months.
On Dec. 13, 2012, Standard & Poor's Ratings Services
downgraded its long- and short-term issuer credit ratings on
National Bank of Canada to 'A-/A-2' from 'A/A-1'. The outlook is
stable. In addition, Standard & Poor's lowered its issue ratings
on National Bank's senior unsecured debt to 'A-' from 'A',
nondeferrable subordinated debt to 'BBB+' from 'A-', and
preferred shares and hybrid securities to 'BBB' from 'BBB+'.
The rating action follows our review of banking sector
industry and economic risks in Canada, taking into account the
headwinds facing the Canadian economy, Canadian consumers' high
debt levels, expectations of decelerating loan demand and
continued pressure on margins, particularly in the Canadian
retail sector, and areas of continuing weakness in the global
economy and financial system.
We believe banks and credit unions operating in Canada are
subject to an expanding set of potential stresses arising from
competitive pressure on growth and margins, while asset quality
is potentially vulnerable--in light of high consumer
indebtedness--to developments that may trigger general economic
deterioration in Canada.
Consequently, we lowered our anchor SACP, which is the
starting point for our ratings on financial institutions
operating primarily in Canada, including National Bank, to 'a-'
from 'a'. This is reflected in our revision of Banking Industry
Country Risk Assessment (BICRA) for Canada to group '2' from '1'
and revised our industry risk score, a component of the BICRA,
to '2' from '1' (see "Various Rating Actions Taken On Canadian
Financial Institutions Due To Rising Industry and Economic
Risks," published Dec. 13, 2012, on RatingsDirect on the Global
We believe that the banks and credit unions are under
incremental pressure from the headwinds facing the Canadian
economy. The acceleration of household debt to record levels has
increased Canadian households' vulnerability to sudden shocks in
incomes, employment, or a spike in interest rates.
Exposure to the consumer sector accounts for nearly
three-fifths of total bank loans, and losses on banks' uninsured
loan portfolios--although recent performance levels have
generally been strong--may be driven higher in the event of a
substantial shock to household creditworthiness, though we
expect effective regulatory supervision to remain a positive
influence on Canadian bank credit quality.
Although we expect ongoing intensification of competitive
dynamics in the Canadian banking sector, we note that overall
Canada still remains positioned favorably vis-a-vis most of its
global peers. However, a slowing economy risks exacerbating the
already-intense competition between banks for loan and deposit
share and puts further pressure on the margin and profitability
of the Canadian financial institutions' retail and commercial
lending businesses, the cornerstone of Canadian banking and
largest contributor to revenues.
We also believe that Canadian financial institutions' risk
tolerances may increase to compensate for lower profitability by
reaching for yield through investments, more aggressive lending
in higher yielding loans such as personal loans and credit
cards, or potentially a pick-up in mergers and acquisitions
Furthermore, we expect that continuing industry conditions
will test banks' operational capabilities. Relative performance
in areas such as service standards, cost control, operational
effectiveness, underwriting discipline, and ability to integrate
acquisitions will likely contribute to changes in market
position and financial performance, and will have an impact on
the relative credit standing among industry participants.
Standard & Poor's ratings on National Bank reflect a
combination of factors including the anchor SACP and
company-specific factors. For National Bank we start at the
anchor of 'a-'. We then adjust for a "moderate" (as our criteria
define it) business position given the company's smaller market
shares relative to Canadian peers', its regional focus in
Quebec, and some degree of potential revenue volatility stemming
from its capital market's businesses; "adequate" capital and
earnings based on Standard & Poor's forecasted risk-adjusted
capital (RAC) ratio in the range of 8% to 8.5%; "strong" risk
position reflecting more favorable credit quality metrics than
many of its domestic peers' and moderate market risk exposure;
and "average" funding and "adequate" liquidity scores, based on
the bank's core deposit base and low-risk securities portfolio,
while recognizing a material wholesale funding component. The
SACP on National Bank is 'a-'.
The stable outlook reflects our expectation that National
Bank will maintain its solid franchise position in Quebec, a RAC
ratio above 7%, and strong asset quality that continues to
compare favorably to that of peers.
The outlook and /or ratings could come under pressure if
asset quality were to deteriorate significantly, as evidenced in
a significant rise in loan losses, if the forecasted RAC ratio
were to fall below 7% over the next 18-24 months, or if capital
markets operations' contribution to revenues, as calculated by
Standard & Poor's, were to consistently exceed 25% for several
An outlook revision to positive would entail a RAC ratio
that is sustainably above 10%, improved market share positions
that mimic those of its large Canadian bank peers, and better
geographic and revenue diversification, but we see positive
rating movements as unlikely in the near term.