Toronto-Dominion, the last publicly traded bank rated Aaa by Moody’s, was cut to Aa1, the ratings firm said today in a statement. Scotiabank fell to Aa2 and the ratings on Bank of Montreal, Canadian Imperial Bank of Commerce, Caisse Centrale Desjardins du Quebec and National Bank of Canada were lowered by one level.
“In the event of a systemic shock -- whether it’s something domestic or it’s something brought on by external risk factors transmitted from Europe or the U.S. to the Canadian economy -- then we would expect, given the size of the Canadian banks’ exposure to consumer loans they would have an elevated level of loan losses,” David Beattie, senior credit officer at Moody’s, said by phone from Toronto.
Toronto-Dominion’s C$650 million ($646 million) of 5.828 percent subordinated notes due July 2023 fell 20 cents to C$116.46. Scotiabank’s C$750 million of 5.65 percent junior notes due in December 2056 fell 38 cents to C$120.44.
The downgrades didn’t faze stock investors, as shares of the biggest Canadian banks showed gains for the day. The nation’s lenders have been ranked the world’s soundest for five straight years by the Geneva-based World Economic Forum.
“To me, it’s minor,” said Ian Nakamoto, director of research at MacDougall MacDougall & MacTier Inc. in Toronto, which manages about C$4 billion in assets, including bank shares. “It’s not going to be a disaster; the Canadian banks are very well prepared for a slowdown.”
Toronto-Dominion rose 0.2 percent to C$83.78 at 4 p.m. in Toronto. Scotiabank advanced 0.8 percent, Bank of Montreal (BMO) added 0.6 percent and CIBC was up 0.6 percent.
Scotiabank and Caisse Centrale were lowered to Aa2 from Aa1, while Bank of Montreal, CIBC and National Bank were each lowered to Aa3 from Aa2.
Moody’s also removed systemic support from all rated Canadian banks’ subordinated debt, including those issued by Royal Bank of Canada. The ratings company put the lenders on review for possible downgrade Oct. 26.
“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,” Moody’s said in a statement.
Royal Bank of Canada (RY), the country’s largest lender, was lowered two levels to Aa3 on June 21 as part of a review of 17 firms with global capital markets operations, including Credit Suisse Group AG, HSBC Holdings Plc and others.
Canadian household debt rose to 165 percent of disposable income in the third quarter, compared with 163 percent in the prior three-month period. Sales of existing homes fell 17 percent in December from the month before while the average sale price rose.
“The Canadian financial sector is sound and well regulated,” Canadian Finance Minister Jim Flaherty said in a statement. The government is continuing to monitor the country’s housing market, he said.
The ruling Conservative Party has “relied on consumer debt to prop up Canada’s economy,” Member of Parliament Peggy Nash of the opposition New Democratic Party said in an e-mailed statement. “This reckless policy has clearly hurt Canada’s banks.”
Scotiabank, Bank of Montreal and National Bank -- Canada’s third, fourth and sixth-largest lenders by assets -- have “sizable exposure” to volatile capital markets businesses, Moody’s said.
National Bank doesn’t think the ratings change “will have a material impact on our activities,” Claude Breton, a spokesman for the Montreal-based lender, said in an e-mailed statement.
Stephen Knight, a spokesman for Toronto-Dominion, said in an e-mailed statement that the lender “remains one of the highest-rated banks globally and the highest-rated bank by Moody’s in Canada.”
Paul Deegan, a spokesman for Bank of Montreal, declined to comment, while CIBC’s Kevin Dove didn’t immediately respond to an e-mail seeking comment. Spokesmen for Scotiabank and Caisse Centrale also didn’t immediately respond to messages sent after regular business hours.
To contact the reporter on this story: Sean B. Pasternak in Toronto at email@example.com