PrefBlog

Following its warning last fall, Moody’s Investor Service has announced:

today downgraded the long-term ratings of six Canadian banks concluding the review initiated on 26 October 2012. The long-term senior debt ratings of the banks were all downgraded by 1 notch. We also removed systemic support from the ratings of all rated Canadian banks’ subordinated debt instruments, including those issued by Royal Bank of Canada (RBC). RBC’s other ratings were affirmed. The short term Prime-1 ratings of the Canadian banks were affirmed. All ratings for these banks now have a stable outlook. Moody’s special comment “Key drivers of Canadian bank rating actions” ([LINK]) provides additional commentary on the rationale behind today’s actions. “Today’s downgrade of the Canadian banks reflects our ongoing concerns that 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 Moody’s Vice President. “Following today’s actions, the Canadian banks still rank amongst the highest rated banks in our global rating universe.”

OVERVIEW OF TODAY’S ACTIONS

Bank of Montreal (BMO; downgraded to Aa3 stable from Aa2 for long-term deposits)

Bank of Nova Scotia (BNS; downgraded to Aa2 stable from Aa1 for long-term deposits)

Caisse centrale Desjardins (CcD; downgraded to Aa2 stable from Aa1 for long-term deposits)

Canadian Imperial Bank of Commerce (CIBC; downgraded to Aa3 stable from Aa2 for long-term deposits)

National Bank of Canada (NBC; downgraded to Aa3 stable from Aa2 for long-term deposits)

Toronto-Dominion Bank (TD; downgraded to Aa1 stable from Aaa for long-term deposits)

Please click on the following link to access the full list of affected credit ratings. This list is an integral part of this press release and identifies each affected issuer: [LINK]

SUMMARY RATINGS RATIONALE

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:

• …
• NBC, BMO and BNS have sizeable exposure to volatile capital markets businesses:
• Moody’s believes that trading and investment banking activities expose financial firms to the risk of outsized losses and risk management and controls challenges, and leave them highly dependent on the confidence of investors, customers and counterparties.
• Canadian banks’ have noteworthy reliance on wholesale funding:
• The Canadian bank’s noteworthy reliance on confidence-sensitive wholesale funding, which is obscured by limited public disclosure, increases their vulnerability to financial markets turmoil.
• Moody’s has removed systemic support from the ratings of all Canadian banks’ subordinated debt instruments that had benefited from support “uplift”:
• The rating agency believes the global trend towards imposing losses on junior creditors in the context of future bank resolutions reduces the predictability of such support being provided to the sub-debt holders of the large Canadian banks given the Canadian regulators’ broad legislated resolution powers. The removal of support for subordinated debt is consistent with recent actions we’ve taken elsewhere, including in many European countries, reflecting the increased likelihood that sub-debt holders would be subject to burden sharing in the event support was required.

The bit about capital markets exposure shows that OSFI’s touting of the benefits is dubious:

Policymakers in Europe and the U.S. are getting set to prohibit banks from getting into risky capital markets activities, but such a step would not make sense in Canada, according a senior executive at the country’s top banking regulator.

Speaking to an industry conference in Toronto, Mark Zelmer, assistant superintendent of the Office of the Superintendent of Financial Institutions, said that for Canada to adopt such a strategy would “be akin to conducting surgery on the [banking system] in the hope of” finding a miraculous solution to the problem of excess risk.
…
Canada has no need to follow the U.S. approach because for decades banks in this country have benefitted from owning capital markets businesses. Ever since lenders were able to own investment dealers back in the 1980s the increased diversification of revenue “helped them weather several financial storms,” he said. “For example, profits from investment banking activities helped cushion bank profits a few years ago when commercial banking activities were experiencing rising loan loss provisions. By the same token, commercial bank profits over the years have helped some banks weather the occasional stumble in capital markets.”

Mr. Zelmer cautioned that the issue is not for OSFI alone to decide, but his comments make clear which way the regulator is leaning.

Anyway, Moody’s ratings on the preferreds are now:

• BMO, Baa2(hyb)
• BNS, Baa1(hyb)
• CM, Baa2(hyb)
• NA, Baa3(hyb)
• TD, A3(hyb)

Like all those hybs? Regulators insist on them, so that investors won’t have to read the prospectus to determine whether a particular instrument is a hybrid or not before buying it.

Issues affect by the preferred share downgrades are (deep breath):
BMO.PR.H, BMO.PR.J, BMO.PR.K, BMO.PR.L, BMO.PR.M, BMO.PR.N, BMO.PR.O, BMO.PR.P, BMO.PR.Q
BNS.PR.J, BNS.PR.K, BNS.PR.L, BNS.PR.M, BNS.PR.N, BNS.PR.O, BNS.PR.P, BNS.PR.Q, BNS.PR.R, BNS.PR.T, BNS.PR.X, BNS.PR.Y, BNS.PR.Z
CM.PR.D, CM.PR.E, CM.PR.G, CM.PR.K, CM.PR.L, CM.PR.M, CM.PR.P
NA.PR.K, NA.PR.L, NA.PR.M, NA.PR.N, NA.PR.O, NA.PR.P
TD.PR.A, TD.PR.C, TD.PR.E, TD.PR.G, TD.PR.I, TD.PR.K, TD.PR.O, TD.PR.P, TD.PR.Q, TD.PR.R, TD.PR.S, TD.PR.Y

This entry was posted on Monday, January 28th, 2013 at 9:34 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.