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Sunday, 27 January 2013 22:19

Investors shaken by credit downgrade for Big Banks

Written by  Vernon Clement Jones
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Moody’s move Monday to downgrade the long-term credit ratings of six Canadian banks sent a chill through investor circles, amid fears that all markets will face significant correction.

The credit ratings firm lowered the score of not only TD, CIBC and Scotia, but smaller players, including National Bank and Desjardins, although RBC would come away unscathed, at least for now.

Moody’s is citing high levels of consumer debt and “high home prices” for the decision to drop each rating by one level, that move coming on the heels of its decision to put all six of the banks under review in the fall. The outlook for each bank, however, remains stable.

"High levels of consumer indebtedness and elevated housing prices leave Canadian banks more vulnerable than in the past to downside risks," Moody’s VP David Beattie, said in the report released Monday.

That double whammy has raised concerns those lenders – drivers of mortgage borrowing over the last five years – are now overexposed to any coming correction in home values. Some analysts have, in fact, predicted as much as a 25 per cent drop in values over the next two years.

Moody’s appears to have taken those types of projections to heart, something already giving investors in some markets concerns about their own long-term property values.

Still, an increasing number of investors are in no rush to sell up, pointing to the best landlord’s market in decades and cash flow horizons that might actually get brighter for those looking and able to acquire new, cheaper properties

Last modified on Tuesday, 29 January 2013 17:47

2 comments

  • Paul Bath CPMB Tuesday, 29 January 2013 14:05 posted by Paul Bath CPMB

    Good Article. What's concerning me more is the fact that Mortgage Brokers are Lending out private funds with a Loan to Value on properties of 85%. mmmmm... a downgrade of 25% in property values will surely cause many Private Mortgage Investors to lose. I have already seen northern properties already drop 20-25%

  • Jim Reid, Broker Tuesday, 29 January 2013 13:47 posted by Jim Reid, Broker

    These desk jockeys are dangerous for their erroneous analyses and wrong conclusions. It started by The Economist who said Canadian prices were high 10 month's ago based upon the systemic flaws in their ratio between rental rates and house prices in Canada.
    Due to our winters, Canadian homes cost more to build and are of better quality than anywhere else in the world. We also have strict rent controls on Landlords. Thus our ratio will always appear higher than other countries like the USA where people can live in a car if the can't afford a house.
    Immigration will keep home demand up in Canada for the foreseeable future. Thus our prices will remain strong.
    Our economy is more diversified than almost every country in the world. We have high employment rates and a highly educated work force. Thus we have stable income flows and are not vulnerable to global trends because we are such a small player and don't need much of the pie to thrive.
    Our banks and credit agencies are more restrictive than anywhere else, so Canadians can't amass debts like the wide-open system in the USA. Our tax system is very different to the USA as we have more consumption tax and higher income taxes than elsewhere.
    It is arrogant and irresponsible for Moody`s to speculate on the stability of our Banks when they have absolutely no understanding of the fundamentals at work in our country. These idiots are trying to create a panic that will cost Canadian senior citizens their retirement savings that are rightly invested in their home equities. They need to be charged with extortion!

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