RY Outlook Negative, Says S&P

Standard & Poor’s has announced:

  • •We believe Royal Bank of Canada’s (RBC) risk appetite has grown relative to peers’.
  • •We are revising our outlook on RBC to negative from stable, reflecting credit quality metrics that have recently converged to the peer average and the risk that this may continue (or worsen).
  • •We are affirming our ratings on the bank, including our ‘AA-/A-1+’ long- and short-term issuer credit ratings.
  • •The negative outlook reflects RBC’s higher risk appetite and aggregate loan risk exposure relative to those of its peers.

“The outlook revision reflects concerns over what we see as RBC’s higher risk appetite, relative to peers’,” said S&P Global Ratings credit analyst Lidia Parfeniuk. “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 also has higher-than-peer average exposure to the highly indebted Canadian consumer and to oil and gas-producing regions. These exposures, and potential future growth, in aggregate, could lead to higher loan losses than peers’.”

RBC’s U.S. wholesale loan portfolio has grown very rapidly. The growth has been, on average, 16% per year, adjusted for foreign exchange from 2010 through 2015. 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.

Adding to the bank’s risk exposures is its higher-than-peers exposure to leveraged loans, which we view as a frothy segment within wholesale lending. We believe that while credit conditions have been benign over the last few years, they may begin to worsen, particularly in a rising-rate environment.

The outlook is negative. We 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. We could revise the outlook to stable if we were to see evidence that risk appetite is moderating and that credit quality metrics recover to a more favorable stance than the peer average.

Oddly, the press release made no reference to the ‘bail-in’ regime, which the agency has previously assigned a position of some importance and which has been endorsed by the new government, as discussed March 22, 2016.

Affected issues are: RY.PR.A, RY.PR.B, RY.PR.C, RY.PR.D, RY.PR.E, RY.PR.F, RY.PR.G, RY.PR.H, RY.PR.I, RY.PR.J, RY.PR.K, RY.PR.L, RY.PR.M, RY.PR.N, RY.PR.O, RY.PR.P, RY.PR.Q, RY.PR.R, RY.PR.W and RY.PR.Z.

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