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Standard & Poor's downgrade of Scotiabank and a number of smaller lenders comes as a surprise, but only because it didn't happen sooner.

Compare the S&P release with the Bank of Canada's most recent Financial System Review, their bi-annual survey of the risks and opportunities facing the sector. According to the BoC's December report, conditions in the banking sector have remained the same for months. Both capital levels and market valuations are strong, and the banks are generally well-positioned to withstand a lot of stress. The major threats are still the euro crisis and Canadians' huge debt burden; despite StatsCan's worrying report that debt continues to rise, as the BoC's chart shows, the growth of household credit has actually been moderating in the last six months.

Arguably most importantly, Minister Flaherty's changes to the CMHC insurance rules in June have been followed by an additionally prudent step: mortgage underwriting rules have also been changed. "Full implementation of the Office of the Superintendent of Financial Institutions' (OSFI) mortgage underwriting guidelines by federally regulated financial institutions is expected to take place no later than fiscal year-end 2012."

As more Canadian borrowers are squeezed out of the housing market, and the existing ones struggle with their current debt burdens, the banks will be pressed to find other sources of revenue – not an easy task when yield is scarce. But these factors were apparent as early as the summer; barring further explanation, S&P's warning just seems like they're playing catch-up.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 9:31am EDT.

SymbolName% changeLast
BNS-N
Bank of Nova Scotia
+0.12%51.22
BNS-T
Bank of Nova Scotia
+0.3%69.63
FISI-Q
Financial Institut
+1.61%18.94

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