Moody’s Demotes Six Canadian Banks

Canada’s dollar and bank bonds declined after Moody’s Investors Service downgraded the nation’s banks for the first time in more than four years, signaling that soaring household debt combined with runaway housing prices leave the lenders more vulnerable to losses.

Spreads on Canadian bank debt were modestly wider after the ratings firm lowered the long-term debt and deposit ratings one level on Toronto-Dominion Bank, Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada and Royal Bank of Canada, Bloomberg reported.

Deposit notes were expected to open three basis points to five basis points wider and non-viability contingent capital bonds were expected to begin trading five basis points to eight basis points wider, Mark Wisniewski, a credit hedge-fund manager for Sprott Asset Management LP, said by phone from Toronto.

The Canadian dollar weakened 0.8% to 1.375 per US dollar in Toronto, extending its loss this year to 2.3%, the worst performance among Group-of-10 peers. An index of Canadian bank shares fell 0.5%.

The downgrade of the Canadian banks follows a recent run on deposits at alternative mortgage lender Home Capital Group Inc. that has sparked concern over a broader slowdown in the nation’s real estate market as Canadians are taking on higher levels of household debt. The firm’s struggles have taken a toll on Canada’s biggest financial institutions, which have seen stocks slide on concern about contagion.

In its statement, Moody’s pointed to ballooning private-sector debt that amounted to 185% of Canada’s gross domestic product at the end of last year. House prices have climbed despite efforts by policy makers to cool the market, it said. Prices in Toronto and Vancouver have soared on the backs of strong economies, limited supply and foreign demand that’s sparking some speculative buying in the two markets. Toronto prices jumped 25% in April from the year earlier.

Home prices in Toronto and the surrounding cities are gaining at a 30% annual pace, prompting provincial leaders to impose a foreign buyers tax and other measures last month to cool what they called dangerous speculation.

Canadian household debt climbed to a record relative to disposable income in the fourth quarter, another sign of strain from a long housing boom. Credit-market debt such as mortgages increased to 167.3% of after-tax income in the October-to-December period from 166.8% in the prior three months. Still, Canada’s consumer confidence is at the highest since at least 2009.

The news is “modestly negative” for spreads of bank bonds, according to Kris Somers, a credit analyst at BMO Capital Markets.

Moody’s also cited high housing prices and consumer debt when it cut five of the banks in January of 2013. That decision cost Toronto-Dominion its Aaa grade.