RBC Downgraded 2 Levels by Moody’s in Review of 17 Firms

Royal Bank of Canada’s credit rating was cut two steps to Aa3 by Moody’s Investors Service because of the lender’s “significant exposure” to volatile capital markets activities. This is the second downgrade to Royal Bank’s long-term credit rating by Moody’s in 18 months.

Royal Bank, Canada’s largest lender by assets, was downgraded from Aa1, Moody’s second-highest level, as part of a review of 17 firms with global capital markets operations. The downgrade puts Royal Bank’s credit rating by Moody’s lower than Canada’s other big banks.

“All of the banks affected by today’s actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities,” Greg Bauer, Moody’s Global Banking managing director, said in a statement.

“RBC remains one of the strongest and highest-rated banks in the world in terms of our credit ratings, capital base and balance sheet,” Katherine Gay, a spokeswoman for Royal Bank, said in an interview. “We expect minimal impact on our business and no impact on our clients.”

Moody’s said Feb. 15 it may cut Royal Bank’s credit rating as much as two levels, as part of its review of firms including Bank of America Corp., Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM) and Morgan Stanley. (MS) Moody’s said it put the ratings of the firms under review because the companies “face challenges that are not fully captured in their current rankings.”

Other Downgrades?

“Royal is the most international of all of Canada’s capital markets banks, they’ve got the biggest platform in Europe, New York and London, and that could explain Royal being rated lower than all its peers,” Peter Routledge, an analyst with National Bank Financial, said in an interview. “It raises the question as to whether the other Canadian banks might suffer downgrades as well.”

Moody’s put Royal Bank’s long-term credit rating under review simply because it’s deemed to have significant global capital markets activities, and the review is not due to specific performance or risk concerns, Gordon Nixon, Royal Bank’s chief executive officer, said March 1 during the company’s annual meeting.

“The downgrade doesn’t affect their funding costs, but it does leave them as the lowest-rated Canadian bank” by Moody’s, Routledge said. “That’s a minor reputation hit.”

Moody’s downgraded Royal Bank’s credit rating to Aa1 from Aaa, the highest level, in December 2010 because of the lender’s increased focus on investment banking and trading. At the time, it was the first downgrade by Moody’s in at least 15 years. Moody’s last upgraded Royal Bank’s rating in March 2007.

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; David Scanlan at dscanlan@bloomberg.net

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