One of the world’s leading debt rating agencies on Monday downgraded five of Canada’s big banks because of exposure to over-leveraged consumers, but stock markets seemed not to notice as bank shares continued on a winning streak that’s been going on more than six months.
Theresa Tedesco: The two engines that have fuelled momentum during the global economic turmoil — consumer credit and residential mortgages — are stalling.
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The action “reflects our ongoing concerns that the Canadian banks’ exposure to the increasingly indebted Canadian consumer and elevated housing prices leaves them more vulnerable to unpredictable downside risks facing the Canadian economy than in the past,” said David Beattie, a senior credit analyst at Moody’s and lead author of the report.
Bank stocks have moved up more than 5% since June, suggesting investors are confident that real estate “is not going to crash,” said Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier Inc., a Toronto-based asset manager.
Even debt markets appear to be brushing off the move.
Theoretically, ratings downgrades make it more expensive for firms to borrow. But in today’s zero interest rate environment, yields on Canadian bank debt are close to the lowest in living memory and it’s hard to see how — especially at a time when demand for highly rated bonds is so strong — that’s going to change any time soon.
Lenders affected by the single-notch downgrade were Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank and Caisse centrale Desjardins.
Royal Bank of Canada, the largest lender, is not included in the group.
For the last several years Bank of Canada Governor Mark Carney has been warning about the dangers of ballooning consumer debt and the vulnerability it creates for the Canadian economy.