Standard & Poor’s Ratings Services has dropped its outlooks on seven Canadian financial institutions to negative from stable on concerns over the economic recovery and the impact of increased competition on the industry.
The affected institutions include three of the big banks, Bank of Nova Scotia, Royal Bank and TD Bank, along with Laurentian Bank of Canada and National Bank of Canada , and Central 1 Credit Union and Home Capital Group Inc.
“The outlook revisions are linked to our evolving views of economic risk and industry risk for banks operating in Canada,” S&P said Friday.
S&P said that, “A prolonged run-up in housing prices and consumer indebtedness in Canada is in our view contributing to growing imbalances and Canada’s vulnerability to the generally weak global economy, applying negative pressure on economic risk for banks.”
The weak global economy could lead to rising unemployment, constraining income growth for Canadian workers, and impairing consumers’ debt servicing capacity, S&P warned; which would also “amplify Canada’s vulnerability to a housing market correction at some point in the future.”
Additionally, the rating agency said that it anticipates an environment of compressed net interest margins, and escalating competitive efforts to sustain or build banks’ market positions. “The prospect of intensifying competition among Canadian banks and other financial services providers is contributing to the potential for a negative adjustment to our view of industry risk in the Canadian banking sector,” it said.
S&P said that the negative outlook recognizes the potential for deterioration of Canadian banks’ financial performance and capitalization. However, it is maintaining stable outlooks on five other Canadian institutions: CIBC, Bank of Montreal, and Caisse Centrale Desjardins, Manulife Bank of Canada and HSBC Bank Canada; due to reasons of rating methodology.
“If the path of consumer leverage or housing prices in Canada were to moderate substantially, taking into account the government’s latest policy measures, we might revise the outlooks on the seven banks back to stable. Further build-up of potential economic stress and escalating competitive pressure could lead to… negative rating actions on individual banks,” S&P warned.