The Asian Banker

Moody's: Canadian banking system stable but household indebtedness a concern
Aug 15, 2013

Toronto, August 8th 2013 - Moody's outlook for the Canadian banking system is stable, as major banks continue to benefit from a favorable industry structure that results in formidable barriers to entry , says Moody's Investors Service in its latest report "Banking System Outlook: Canada."

Moody's industry outlooks reflect the rating agency's expectations for fundamental business conditions in the industry over the next 12 to 18 months.

"The major Canadian banks benefit from sustainable double-digit market shares across all significant retail and commercial financial services and products," said Moody's Vice President & Senior Credit Officer David Beattie. "This provides them with scale and recurring earnings power in their home market, as well as significant efficiency advantages."

Moody's says the banks' domestic retail and commercial franchises are very profitable, primarily owing to low-risk activities centered on the banks' residential mortgage platforms. Compared with their peers in other global banking systems, Canadian banks also have leading asset quality metrics and their capital levels are sound, reflecting very stable internal capital generation, added the rating agency.

However, high household debt, elevated housing prices and the impact of banks' diversification strategies outside of their domestic retail and commercial operations represent downside risks to the stability of the Canadian banking system, says Moody's. Overleveraged Canadian consumers are more vulnerable to an economic downturn and a rise in interest rates, which were factors in Moody's downgrade of the Canadian banks in January 2013.

Moody's rates seven banks in the system that comprise 93% of the assets in the system. The asset-weighted average long-term deposit rating is Aa2, and the rating outlooks are all stable. The banks' deposits and senior debt and other senior obligations continue to benefit from Moody's assumption of government support. A new bail-in regime for senior debt is under active consideration by policymakers, but Moody's does not yet have sufficient information about the government's intentions around existing senior debt to modify its assessment of support for these securities. Moody's therefore retains for the time being stable outlooks for the supported senior debt and deposit ratings, but would review that assumption in the event of developments suggesting that existing senior debt is more likely to be included in burden-sharing in a future recapitalization.

Earlier this year, Moody's withdrew its support assumptions for the Canadian banks' subordinated debt ratings.


Re-disseminated by The Asian Banker

Categories: Results & Ratings
Keywords: Moody's

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