RBC Among Canadian Bank Outlooks Cut to Negative by Moody’s

Jun 11, 2014 5:21 pm ET

(Updates with analysts’ comments starting in 11th paragraph.)

June 11 (Bloomberg) -- Royal Bank of Canada, Bank of Nova Scotia and five other Canadian lenders had their outlooks cut to negative by Moody’s Investors Service, which cited rules that would limit government support.

Moody’s decision to reduce the outlook from stable reflects its view that risks for debt holders and uninsured depositors “has shifted to the downside,” the New York-based ratings company said today in a statement.

Financial regulators around the world have been increasing oversight to limit a repeat of the bailouts that propped up lenders hobbled by the 2008 financial crisis. Standard & Poor’s cut the outlooks of 15 European banks to negative in April on the prospect that governments are less likely to provide aid.

“These actions are taken in the context of previously announced plans by the Canadian government to implement a ‘bail- in’ regime for domestic systemically important banks and the accelerating global trend toward reducing the public cost of future bank resolutions through such burden-sharing,” Moody’s said in the statement.

Canada’s bail-in proposal will seek to prevent a rerun of the financial crisis by legislating that bondholders convert their debt to equity if a bank becomes insolvent. The country’s finance department, which first disclosed plans for the regime in March 2013, hasn’t said when the rules will be introduced.

‘A Shift’

“It’s more likely than not the Canadian bail-in regime would have a negative impact on senior noteholders and uninsured depositors,” David Beattie, senior credit officer at Moody’s, said by phone from Toronto.

Other lenders affected include Toronto-Dominion Bank, Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada and Desjardins Group.

“This is not a downgrade on any particular bank,” Maura Drew-Lytle, a spokeswoman for the Canadian Bankers Association, said in an e-mail. “Moody’s is just changing its broad outlook.”

Spokesmen for Toronto-Dominion, Bank of Montreal, Royal Bank and National Bank declined to comment, while CIBC didn’t respond to e-mails and phone calls. Andre Chapleau, a Desjardins spokesman, said the Quebec-based cooperative remains among the strongest financial firms in Canada.

Bank Stocks

The eight-company Standard & Poor’s/TSX Commercial Banks Index, which includes most of the lenders, fell 0.4 percent in Toronto trading.

Canadian lawmakers should avoid falling in line with international rules that don’t fit the country and would raise the cost of doing business, said David Dodge, a former Bank of Canada governor.

“Regulation based on a set of highly detailed rules will increase dead-weight compliance costs and hence raise the cost of financial services in the years ahead,” Dodge, a senior adviser at law firm Bennett Jones, said in an economic outlook published today on the firm’s website.

Scotiabank’s financial-strength rating outlook was also cut to negative from stable.

Moody’s cited concerns about Toronto-based Scotiabank redeploying capital gained from selling a stake in Canadian money-manager CI Financial Corp. into its international operations, which would “dilute the strong credit profile” of its domestic business.

Risk Appetite

Scotiabank’s purchase of 20 percent of Canadian Tire Corp.’s financial unit, which increases its risk from unsecured consumer credit, and the firm’s strategy to expand credit-card lending and auto financing, also were mentioned by the ratings firm.

“I don’t think Scotia’s risk appetite is changing, the areas in which they’re growing is changing,” Rob Sedran, a CIBC analyst, said in a telephone interview. “You are shifting your risk profile, but you’re not shifting your risk culture.”

Diane Flanagan, a Scotiabank spokeswoman, said in an e- mailed statement that the Toronto-based lender’s “strategy is sound and our risk appetite remains substantially unchanged.”