New York-based Standard & Poor’s Financial Services LLC’s (S&P) global ratings division has dropped its outlook on Royal Bank of Canada (RBC) to negative, indicating that the bank could face a downgrade in the next couple of years if its credit metrics deteriorate thanks to an apparent rise in its risk appetite.

In a new report, the credit-rating agency says that RBC’s risk appetite has grown relative to the other Canadian banks. As a result, S&P is revising its outlook on the bank’s credit rating downward to negative from stable, noting that its credit quality metrics “have recently converged to the peer average and the risk that this may continue [or worsen].”

Nevertheless, S&P affirmed its current ratings, including the “AA-/A-1+” long- and short-term issuer credit ratings, on RBC. The negative outlook indicates that S&P could lower the rating over the next two years if RBC’s credit quality metrics remain at the peer average — or worse — for several quarters. This would most likely result in the issuer credit rating falling by one notch to ‘A+’, to reflect the higher risk profile, it says.

“The outlook revision reflects concerns over what we see as RBC’s higher risk appetite, relative to peers’,” says Lidia Parfeniuk, credit analyst with S&P, in a report. “We see one example of this in its aggressive growth in loans and commitments in the capital markets wholesale loan book, particularly in the U.S., with an emphasis on speculative-grade borrowers, including exposure to leveraged loans.”

RBC’s U.S. wholesale loan portfolio has grown 16% per year, on average, from 2010 through 2015, the S&P report says: “We believe that the emphasis has been on speculative-grade loans. We also believe the bank has been increasing risky exposure to improve risk-adjusted returns amid low interest rates.”

RBC is also more heavily exposed to leveraged loans, which S&P says it views as “a frothy segment within wholesale lending.” Furthermore, RBC has has higher exposures to lending in Alberta and to the Canadian consumer, S&P notes.

“These exposures in aggregate could lead to higher-than-peers loan losses should oil prices remain low, unemployment rise, and home prices substantially correct,” the S&P report says.

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