Concerns about consumer debt and home prices in Canada prompted Moody's Investors Service to place the long-term ratings of six Canadian banks on review Friday for a possible downgrade.
The ratings agency said high levels of consumer debt and high housing prices have left the banks more vulnerable to downside risks to the Canadian economy than in the past.
"Moody's recognizes the strong domestic franchises and solid earnings capacity of these large Canadian banks, and they will continue to rank among the highest-rated banks globally following this review," said David Beattie, a senior credit officer at Moody's.
The agency put Bank of Montreal (TSX:BMO), Bank of Nova Scotia (TSX:BNS), Caisse Centrale Desjardins, CIBC (TSX:CM), National Bank of Canada (TSX:NA) and Toronto-Dominion Bank (TSX:TD) under review.
Royal Bank (TSX:RY), Canada's largest bank, was not included on the list on Friday.
A downgrade by a credit rating agency usually means investors will demand a higher interest rate when a bank goes to raise cash by issuing bonds or other debt.
Moody's cut Royal Bank's long-term deposit rating to Aa3 from Aa1 in June as part of a move to cut the credit ratings of 15 of the world's largest banks, including Bank of America, JPMorgan Chase, Citigroup and Goldman Sachs.
At the time, the agency noted that RBC has stronger buffers than many of its global peers in the form of earnings from other, generally more stable businesses.
Both Bank of Canada governor Mark Carney and Finance Minister Jim Flaherty have repeatedly warned Canadians about taking on too much debt.
Earlier this month, Statistics Canada released revised data showing that household market debt has risen to 163 per cent of disposable income, well above the 152 per cent previously reported using a less focused measure.
The housing market in Canada has also shown signs of cooling.
The Canadian Real Estate Association reported last week that despite a slight recovery from August, home sales in September fell 15.1 per cent from a year ago due to tighter mortgage lending rules and an uncertain economy.
Moody's noted that its central scenario for Canada's economy is for growth between two per cent and three per cent next year, but the downside risks have increased.
The agency noted that a weak U.S. economic recovery, the ongoing crisis in Europe and a slowdown in emerging markets all weigh on commodity prices.
"Should these risks materialize, they would have significant ramifications for the Canadian economy that would be transmitted into the banking system," Moody's said.
In addition, the agency said National Bank, Bank of Montreal, Bank of Nova Scotia and CIBC have sizable exposure to the volatile capital markets businesses.
Moody's said TD is also exposed to the U.S. market, while Caisse Centrale Desjardins' concentrated franchise structure reduces its flexibility.
While Moody's said it was reviewing the long-term ratings, the agency affirmed its short term Prime-1 ratings on the six banks.
In July, Standard & Poor's Ratings Services revised its outlook from stable to negative on seven Canadian banks over concerns about unsustainably high home prices and consumer debt levels.
The debt-rating firm revised its outlook downward on Royal Bank, TD Bank, Scotiabank , National Bank, Laurentian Bank (TSX:LB), Home Capital Group Inc. (TSX:HCG) and Central 1 Credit Union.
The credit rater, however, reaffirmed the credit ratings on all seven banks.
S&P also affirmed its ratings and maintained stable outlooks on five other Canadian banks including CIBC and Bank of Montreal.
What Canadian Banks' Profits Can Buy You
Canada's Big Five banks recorded a total profit of $7.5 billion in the three months ending July 31, 2012. Here's what that money can buy you.
Tuition for 1,397,689 undergrads
The average undergraduate tuition in Canada today <a href="http://www.statcan.gc.ca/daily-quotidien/110916/dq110916b-eng.htm" target="_hplink">stands at $5,366</a>.
5 billion fees for using another bank's machine
Banks can charge up to $2 or even $2.50 for non-customers using their machines, but we've used the more common $1.50 charge for this calculation.
1.36 billion fresh whole chickens
The going retail rate for a whole chicken in Canadian supermarkets <a href="http://www3.agr.gc.ca/apps/aimis-simia/rp/index-eng.cfm?report_format_type_code=21&action=gR&signature=DE08B1F45FFD7EDA1F7CEEA304E235E2&pdctc=&r=116&pTpl=1&btnDownload=View" target="_hplink">was $5.52 in June of 2012</a>.
2.5 billion rides on Toronto's streetcar
The cash fare rate on the TTC is $3.
1,978,891,820 poutines at Harvey's
Assuming a retail price of $3.79 each.
1.25 million 1978 Darth Vader figurines
They go <a href="http://actionfigures.about.com/od/historyofactionfigures/tp/top_5_starwars.htm" target="_hplink">for about $6,000 each these days</a>.
The average annual salary of 163,043 Canadians
The average salary in Canada is <a href="http://www.workopolis.com/content/advice/article/1821-how-much-money-are-we-earning-the-average-canadian-wages-right-now" target="_hplink">around $46,000</a>.
4.54 billion medium-sized double-doubles at Timmies
Assuming a pre-tax price of $1.65 per cup.
7,500 performances by Sting at your birthday party
It's estimated the singer <a href="http://www.thestar.com/news/gta/article/1079200--sting-plays-toronto-woman-s-45th-birthday-bash" target="_hplink">charges $1 million per performance</a>.
468,896 Honda Civics
The basic model at the suggested retail price of $15,995.
48 trips to the moon
British company Excalibur Almaz is <a href="http://www.huffingtonpost.com/2012/06/22/excalibur-almaz-tickets-moon-photos_n_1619761.html" target="_hplink">selling tickets for trips to the moon at a cool $155 million</a>.
The entire economy of the Bahamas
The Bahamas <a href="http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)" target="_hplink">produced $7.7 billion in wealth in 2011</a>, slightly more than Canadian banks' $7.5 billion in profits in a three-month period.
5. BMO: $17 Billion
The financial support extended to BMO amounted to 118 per cent of the bank's value at the time, <a href="http://www.policyalternatives.ca/publications/reports/big-banks-big-secret" target="_hplink">according to the CCPA</a>.
4. CIBC: $21 Billion
The financial support extended to CIBC amounted to 148 per cent of the bank's value at the time, <a href="http://www.policyalternatives.ca/publications/reports/big-banks-big-secret" target="_hplink">according to the CCPA</a>.
2. (tie) RBC: $25 Billion
The financial support extended to RBC amounted to 63 per cent of the bank's value at the time, <a href="http://www.policyalternatives.ca/publications/reports/big-banks-big-secret" target="_hplink">according to the CCPA</a>.
2. (tie) Scotiabank: $25 Billion
The financial support extended to Scotia amounted to 100 per cent of the bank's value at the time, <a href="http://www.policyalternatives.ca/publications/reports/big-banks-big-secret" target="_hplink">according to the CCPA</a>.
1. TD Bank: $26 Billion
The financial support extended to TD amounted to 69 per cent of the bank's value at the time, <a href="http://www.policyalternatives.ca/publications/reports/big-banks-big-secret" target="_hplink">according to the CCPA</a>.