NDP finance critic Peggy Nash is alarmed, outraged even, by a mass downgrading Monday by Moody's Investors Service of six Canadian banks (excluding Royal Bank of Canada, which it downgraded last year). To the NDP, this is "another sign that Conservative mismanagement is threatening the long-term health of Canada's economy," she said in a statement. "This reckless policy has clearly hurt Canada's banks."
Hurt the Canadian banks? Maybe their pride, but probably not. In fact, it's pretty much business as usual on Bay Street. The credit rating downgrade leaves Canada's banks as a group tied with Australia's as the second highest-rated group of national banks in the world, behind only Singapore. Banks the world over have had their ratings slashed, and many in the U.S. in Europe remain in bad shape. Monday's downgrade had zero impact on share prices of the big Canadian banks – they all closed higher at the end of trading. Investors just don't care.
"What Moody's is saying is Canadian banks are very, very slightly more likely to default than they were yesterday, but not by much," said a nonplussed National Bank Financial analyst Peter Routledge.
Of course there are reasons to be somewhat concerned by the Moody's downgrade: the Canadian banks are exposed to the increasingly indebted Canadian consumer and elevated housing prices, which are troublesome for the Canadian economy. Canadian banks are relatively more vulnerable to external shocks than they were three years ago.
In addition, said Moody's vice-president David Beattie in an interview, "Low interest rates and low growth are hard on banks," although the blame there lies on independent central banks and a credit crisis that started elsewhere, not with the government of Canada. That situation, he added, is unlikely to change "for the foreseeable future."
Here's something else that isn't likely to change: foreign ownership limits that leave Canadians hostage to a fat and prosperous gang of oligopolistic banks for their basic banking needs. Canada's banks continue to profit from their core domestic banking business, are prudently managed, well capitalized and tightly regulated, and have largely stayed out of trouble in recent years as they have deployed their excess capital abroad.
Their dividend yields range from 3.7 to 4.5 per cent and they trade at a 10.9 multiple of estimated current-year earnings, on average – one point below the level when the economy is humming along. A Canadian housing correction isn't likely to reach the dangerous levels of the U.S. subprime meltdown, and don't forget all of that Canadian Mortgage and Housing Corporation mortgage insurance that protects the banks.
Even the lowest-rated Canadian banks – RBC, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada – all now sport Moody's' Aa3 long-term rating and "Stable" outlook, which translates into less than a 0.3-per-cent chance they will default in the next three years. Moody's further expects the Canadian government would step in to support any of its main banks should the system collapse. If that day were to come, we'd all have much bigger problems to contend with than the state of the Canadian banks.
Sean Silcoff