02/16/2012 10:55 EST

RBC Downgrade Coming? Moody's Puts Canada's Largest Bank On Notice


UPDATE: The Royal Bank of Canada says it doesn't belong on a list of banks targeted for a possible credit rating downgrade.

"This action does nothing to help investors differentiate between strong banks and weak ones," the bank said in a statement reacting to news that Moody's has placed it among 17 financial institutions that may face a downgrade in the near future. "RBC's credit rating and capital base are among the strongest of all banks globally."

Moody's downgrade was a reflection of the credit rating agency's concerns about the health of capital markets businesses. RBC noted that capital markets account for only a quarter of its activities.

The Royal Bank of Canada is among 17 financial firms that Moody’s ratings agency has listed as being at risk of a downgrade.

It’s the second time in two months that Canada’s largest financial institution has faced a downgrade from Moody’s and it highlights concerns among some observers that Canada’s banking sector is not immune from the credit crunch that has enveloped the global economy.

“These firms face challenges that are not fully captured in their current ratings,” Moody’s stated in a note released Wednesday. “Capital markets firms are confronting evolving challenges, such as more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions.”

Moody’s downgraded RBC one notch in December, from Aaa to Aa1, and in its note Wednesday warned the bank faces another downgrade of two more notches.

Other banks under review for downgrades include Citigroup, Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley. Moody’s also extended ongoing reviews for downgrades on 11 companies.

The announcement comes just days after the ratings agency said that it was cutting the ratings of Italy, Portugal and Spain because of uncertainty over the eurozone’s ability to enact reforms necessary to dig out of its debt crisis and Europe’s weakening economy.

Canada’s banks have been lauded in recent years for largely avoiding the credit crisis that has enveloped many U.S. and European banks, and Canada’s regulatory structure has been praised for helping to maintain a stable banking sector.

But some observers have questioned whether Canada’s banks are as sound as they appear. In a controversial note last summer, the influential Zero Hedge blog argued that Canada’s banks could be in financial trouble if the value of their assets drops.

Zero Hedge said Canadian banks’ tangible common equity ratio -- a measure of financial stability -- was among the lowest in the world, making them prime candidates for financial difficulties in case of another downturn.

But others argued that Zero Hedge was ignoring the quality of Canadian banks’ assets, and if that is taken into account, Canadian banks are among the safest.

Moody’s downgrade warning evidently did not come out of the blue. According to analysts at CreditSights, Moody’s had warned of this move before.

"For the past two years, the big banks/brokers have been repositioning their funding activities in advance of these potential rating agencies' adverse actions," CreditSights wrote.

In its note Wednesday, Moody’s also said it is extending its reviews on whether to lower ratings on Credit Suisse, Macquarie, Nomura, UBS, Barclays, BNP Paribas, Credit Agricole, Deutsche Bank, HSBC, Royal Bank of Scotland and Societe Generale.

With files from the Associated Press

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