Canadian Banks' Rating Hostage to Interest Rates

Because of mortgage insurance, this is not a capital risk, just an earnings risk. Canadian banks are already underperforming. Things that could trigger the actual downgrade, not just a warning: prolonged downturn in house prices, employment degradation or follow thru on the threat to raise interest rates, thereby putting debt servicing at risk. S&P warned that a race to the bottom for market share by the banks might also trigger a downgrade. Consumer Debt Eroding Canada Banks’ Edge as S&P Cuts Outlook

In addition to Royal Bank of Canada and Toronto-Dominion Bank, S&P cut to negative its outlook on Bank of Nova Scotia (BNS), National Bank of Canada (NA) and Laurentian Bank of Canada (LB), based in Montreal, Vancouver-based Central 1 Credit Union and Home Capital Group Inc. (HCG) of Toronto. It said it was affirming the credit outlooks for Canadian Imperial Bank of Commerce and Bank of Montreal (BMO), among other banks.

Debt of Canadian financial companies returned 0.5 percent in July, Bank of America data shows. Only Japanese banks, at 0.4 percent, returned less among the 35 countries’ lenders measured in the index, which averaged returns of 1.6 percent. Peru was the highest at 3.5 percent.

Carney has kept the central bank’s benchmark lending rate at 1 percent since September 2010, the longest period without a change since the 1950s. The ratio of household debt to disposable income reached about 154 percent in the first quarter, higher than the U.S. figure of 141 percent.

Consumer debt has increased to more than 90 percent of gross domestic product, from 70 percent over the past decade, S&P said.

S&P, which said it might lower the ratings on Royal Bank of Canada (RY) and Toronto-Dominion one level, said it “will continue to consider the impact of recent government and regulatory policy initiatives to curtail potential systemic risk arising from the housing sector as well as assess Canada’s relative performance vis-à-vis its global peers.” Royal Bank of Canada and Toronto-Dominion are rated AA- by S&P, the fourth-highest level.