Canadian Banks Downgraded By Standard & Poor's; Warns Of Growing 'Headwinds'

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CANADIAN BANKS DOWNGRADED
Standard & Poor’s has downgraded the ratings of six of Canada’s financial institutions by one notch. | CP

TORONTO - Standard & Poor’s has downgraded the ratings of six of Canada’s financial institutions by one notch.

The credit ratings agency cites a softening economy, low interest rates and pressure from the headwinds facing Canada’s economy.

"We believe that the Canadian banking sector is encountering incremental pressure from headwinds facing the Canadian economy, which is heightening economic risk in the banking system," S&P said in announcing the downgrades.

It added that it expects intensifying competition for loans and deposits "will lead to pressure on profitability growth, especially in banks' retail businesses."

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The firm lowered its ratings by one notch on Scotiabank (TSX:BNS) to A-plus. National Bank of Canada (TSX:NA), Laurentian Bank of Canada (TSX:LB), Central 1 Credit Union , Caisse centrale Desjardins and Home Capital Group (TSX:HCG) were also lowered one notch.

The outlooks for all six financial institutions are stable.

S&P also affirmed its credit ratings on the Royal Bank (TSX:RY) and TD Bank (TSX:TD) and raised its outlook to stable from negative. The agency currently rates both banks at double-A-minus.

A downgrade by a credit rating agency usually means investors will demand a higher interest rate when a company goes to raise cash by issuing bonds or other debt.

In its report, says the Journal, S&P noted that loan demand was approaching a cyclical peak and expected to moderate after several quarters of robust growth.

Other economic factors have also brought Canadian financial institutions under increased scrutiny from ratings agencies.

Back in October, Moody's Investors Service announced it was placing the long-term ratings of six Canadian banks under review Friday for a possible downgrade.

It said high levels of consumer debt and high housing prices had left the banks more vulnerable to downside risks to the Canadian economy than in the past.

The agency put Bank of Montreal (TSX:BMO), Bank of Nova Scotia, Caisse Centrale Desjardins, CIBC (TSX:CM), National Bank of Canada and Toronto-Dominion Bank under review.

Royal Bank was not included on the list.

Moody's had already 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 had stronger buffers than many of its global peers in the form of earnings from other, generally more stable businesses.