Moody's Investors Service has cut the ratings of six Canadian financial institutions, including the previously "Aaa" rated Toronto-Dominion Bank, due to concerns about rising consumer debt and high housing prices.
TD, the only publicly traded bank that still carried Moody's top rating, was downgraded, along with Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Bank of Montreal, National Bank of Canada and Caisse Central Desjardins, Canada's largest association of credit unions, Moody's said on Monday.
The cuts, which were widely anticipated after Moody's put the lenders on credit watch in October, were all by one notch.
Ratings downgrades typically lift the cost of borrowing for the affected financial institution.
However, investors did not seem perturbed by the action, as shares of all five TSX-listed banks rose on Monday, led by Scotiabank, which climbed 0.8 percent to C$58.95.
"I'm not surprised to see that there wasn't a lot of market movement, I think it's already been reflected in the market," said Tom Lewandowski, a St. Louise-based analyst at Edward Jones.
"In my opinion, it's jut an additional acknowledgement of the risks that are out there."
The only major Canadian bank not included in the cut was top player Royal Bank of Canada. That was because Moody's cut RBC's ratings by two notches last June as part of a review of 17 global banks.
Canada's banking system has been named the soundest in the world five years in a row, and indeed Moody's noted the banks remain among the highest rated in the agency's global rating universe.
But the outlook for the sector has become murky due to record consumer debt levels, combined with increased downside risks to the Canadian economy, Moody's said.
"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," the agency said in a statement.
Canadian consumer debt as a percentage of household income hit a record 165 percent during the third quarter, which is around the level of U.S. consumer debt before the 2008 housing crisis.
Canada's housing sector largely side-stepped the U.S. crisis and has continued to charge ahead. But recent softness in activity and pricing has suggested the sector may be peaking.
Moody's also pointed to high capital markets exposure at Bank of Montreal and National Bank, which increases those banks' exposure to a market downturn.
Moody's now rates TD's long-term debt at Aa1. Scotiabank and Caisse central Desjardins are at Aa2, and the others are at Aa3.
(Reporting by Cameron French, additional reporting by David Gaffen in New York; Editing by Richard Chang and Dan Grebler)