Standard & Poor’s Ratings Services Thursday revised its outlook on two Canadian banks, to stable from positive, due to growing economic uncertainty.
The rating agency pared back its outlook on Royal Bank of Canada (TSX:RY) and Toronto-Dominion Bank (TSX:TD), “on reduced expectations that future operating outperformance will provide sufficient grounds for anupgrade in the near term.”
S&P affirmed its ‘AA-‘ ratings on both banks.
S&P says that the contraction of Canada’s second-quarter GDP (negative 0.4% on an annualized basis) “points to what may be a bumpy path back to full capacity utilization for the Canadian economy”. Also, uncertainty about Europe is weighing on the general business environment, it notes.
For RBC, the positive outlook was primarily predicated on the bank continuing to outperform its domestic peers in the domestic retail and commercial marketplace and on clear evidence of asset quality stabilizing and improving in the US, S&P says. It notes that RBC met its expectations; nevertheless, “from an industry perspective an upgrade at this time would not be warranted as we believe slowing economic growth will put pressure on operating performance for RBC and other Canadian banks.”
“The stable outlook incorporates our expectations that RBC will maintain stable operating performance across a range of economic conditions, though lower growth prospects in Canada may weigh on short-to medium-term operating performance,” said Standard & Poor’s credit analyst Lidia Parfeniuk.
Similarly for TD, Standard & Poor’s says it believes that TD Bank is well positioned to weather more challenging operating conditions while continuing to build its Canadian and U.S. retail-oriented financial services franchises, but current economic and market conditions have reduced the potential for an upgrade. “The stable outlook incorporates our expectations that TD Bank will exhibit stable ongoing operating performance, despite a possibly deteriorating economic environment,” said Standard & Poor’s credit analyst Thomas Connell.