(Adds that some mortgages are insured by private companies, in
By Andrea Hopkins
OTTAWA May 11 Concern about Canada's heavily
indebted households and hot housing market ratcheted higher on
Thursday after Moody's downgraded the ratings for Canada's major
banks, sending shares of the lenders lower and weakening
The ratings agency cited ballooning private-sector debt and
unchecked house appreciation as it trimmed the credit ratings
for Canada's six largest banks, highlighting the risk of big
losses if borrowers get caught in a housing crash.
"Continued growth in Canadian consumer debt and elevated
housing prices leaves consumers, and Canadian banks, more
vulnerable to downside risks facing the Canadian economy than in
the past," Moody's Senior Vice President David Beattie said.
Canada's household debt-to-income ratio has risen to a
record high 167 percent and house prices have more than doubled
in the two biggest markets, Toronto and Vancouver, since 2009.
The downgrade is expected to turn banks and investors more
cautious about Canada's long housing boom and heady mortgage
market, coming just weeks after Home Capital Group, Canada's
biggest non-bank lender, faced a sharp withdrawal of deposits
after a regulator said it made misleading statements to
investors about its mortgage underwriting business.
"We recognize the challenges around housing," Prime Minister
Justin Trudeau told reporters in response to questions about the
downgrade and high levels of consumer borrowing.
Federal and provincial governments alike have taken steps to
crack down on speculation and tighten mortgage lending rules to
prevent borrowers from taking on too much debt to get into the
expensive housing market as fears of a bubble rise.
Shares of Royal Bank of Canada, Toronto-Dominion
Bank, Bank of Nova Scotia, Bank of Montreal
, Canadian Imperial Bank of Commerce and
National Bank of Canada fell moderatedly in mid-morning
trade, weighing on the Toronto Stock Exchange.
CIBC led the losses, falling C$1.31 to C$107.25, while
National Bank declined 95 Canadian cents to C$53.21.
The downgrade also weakened the Canadian dollar in early
trade, adding to concern about depressed oil prices and a more
uncertain trade outlook with the United States, though the
loonie regained ground to C$1.3691 to the U.S. dollar, or 73.04
U.S. cents, by late morning.
Elevated consumer debt and imbalances in the housing market
have been repeatedly cited as the most important vulnerability
in Canada's financial system by the central bank, and signs of
cooling in Toronto and Vancouver have sparked fears that the
correction could be uneven.
Household debt has risen to record levels in recent years,
with Canadians owing C$1.67 for every dollar of disposable
income in the fourth quarter of 2016.
Still, mortgage defaults and delinquencies remain low
despite the high level of household debt, with official interest
rates near historic lows and employment growing.
"We haven't seen loan losses tick up or anything that's
really deteriorating right now," said Manash Goswami, portfolio
manager at First Asset Investment Management Inc, which owns
shares of TD, Royal Bank, and Scotiabank. He added that the
downgrade did not affect his position on the banks.
"Right now, we're not very concerned, given strong capital
positions," Goswami said. "Earnings growth might slow down but
we don't think it's necessarily going to fall off a cliff."
Executives at the six big banks have long said their
mortgage lending has been prudent, and all high-ratio mortgages
are insured by the federal Canada Mortgage and Housing Corp or
private companies Genworth MI Canada and Canada Guaranty,
insulating the banks from defaults.
(Additional reporting by Leah Schnurr and David Ljunggren in
Ottawa and Solarina Ho and Fergal Smith in Toronto; Editing by