Tuesday, January 29, 2013

Moody's Downgrades 5 Canadian Banks by One Notch

  
Scotiabank, Global Banking and Markets, 29 January 2013

Event

• Moody's downgraded the credit ratings of BMO, BNS, CM, NA and TD by 1-notch. The outlook for the banks was set to Stable.

• The downgrades were expected as Moody's had placed the five banks on review for downgrade on October 26th 2012.

Implications

• Moody's highlighted the increase in house prices in Canada, high consumer indebtedness, downside risks to the Canadian economy, and risks inherent in capital markets activity as factors for the downgrades.

• However, Moody's acknowledged the credit strength of Canadian banks, supported by the strength and stability of the earnings generated by their domestic retail banking franchises.

• Despite the downgrades, Canadian banks remain amongst the highest rated banks globally.

Recommendation

• The downgrades are a continuation of the trend by credit rating agencies in downgrading the global banking sector, with RY previously downgraded by Moody's in June 2012.

• We view the downgrades as mildly negative, with no impact on cost of funds and bank share prices. The concerns highlighted by Moody's have been the cause of headline risk for Canadian banks and, we believe, have been fully reflected in bank valuations.

• Maintain Overweight recommendation.
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