Briefing highlights
- Rating agencies flag concerns on banks
- Markets at a glance
- Builders on pace for best year since slump
Agencies flag concerns
The big international credit rating agencies are casting a wary eye on Canada's banks.
Moody's Investor Service downgraded the major banks in mid-May, citing inflated home prices and swollen household debt. Fitch Ratings, in turn, warned less than a month later that home prices in Toronto and Vancouver could be an issue for the banks, though it changed no ratings.
Now, Standard & Poor's is flagging similar concerns, but says Canadian banks should be able to weather any storms. S&P made no changes to ratings of the banks, which are seen as among the healthiest in the world.
But the agency warned of "significant macroeconomic and policy risks" to the performance of the banks, citing high home prices, fat and "still growing" household debt, and policy plans for risk-sharing among lenders.
"We view the trend for Canada's economic risks as negative, primarily because of the macroeconomic risks associated with elevated house prices and consumer debt levels," S&P said in a recent report.
"We note, however, that the banking sector is largely cushioned from the direct impact of a potential housing market correction, given the support Canadian banks receive – via guarantees on mortgage insurance applicable to approximately half of their residential mortgage loans – from the government," it added in its midyear "industry report card."
"The banking sector is therefore more likely to be affected, in such a scenario, by the indirect effects on non-mortgage consumer loans. Moreover, housing demand appears to be cooling in the face of rising borrowing costs and mortgage rule changes, so the risk of a hard landing appears to be receding somewhat."
S&P noted several good signs, including an economy on the upswing and "solid" profits for the banks in the first half of the year. Negotiations involving the North American free-trade agreement, though, are a risk.
They begin next week.
"Our base-case macroeconomic assumptions are that current initiatives to reopen the North American free-trade agreement (NAFTA) proceed in an orderly manner, and that the result does not greatly destabilize established Canada-U.S. trade patterns," the agency said.
"A destabilizing rewrite of the NAFTA, were it to occur, could raise unemployment and deter business investment in Canada (three-quarters of Canadian exports are sold to the U.S.), raising risks to the Canadian banking sector (and other sectors) in a number of ways."
Canadian rating agency DBRS also recently reviewed individual banks.
Of some of the banks, DBRS said it's concerned by inflated home prices in the Vancouver and Toronto areas, and what a slump could mean, but added that the related portfolios of all of the major banks appear "conservatively underwritten" or insured.
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