S&P cuts outlook on 7 Canadian banks

A pedestrian walks past the Toronto Dominion Bank Tower in Toronto November 18, 1999. THE CANADIAN PRESS/AP, Kevin Frayer

TORONTO - Standard & Poor's Ratings Services has revised its outlook from stable to negative on seven Canadian banks over concerns about unsustainably high home prices and consumer debt levels.

The New York debt-rating firm revised its outlook downward on Royal Bank of Canada (TSX:RY), Toronto-Dominion Bank (TSX:TD), Bank of Nova Scotia (TSX:BNS), National Bank of Canada (TSX:NA), Laurentian Bank of Canada (TSX:LB), Home Capital Group Inc. (TSX:HCG) and Central 1 Credit Union.

"A prolonged run-up in housing prices and consumer indebtedness in Canada is in our view contributing to growing imbalances and Canada's vulnerability to the generally weak global economy, applying negative pressure on economic risk for banks," S&P said Friday.

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 Canadian Imperial Bank of Commerce (TSX:CM) and Bank of Montreal (TSX:BMO).

Banks began to warn as early as the closing months of 2011 that consumer borrowing would slow as pent-up demand in the housing market becomes exhausted. Meanwhile, low interest rates have been putting pressure on their bottom lines.

Warnings from the banks also suggested that mortgage lending could drop off this year as consumers focus on reducing debt and mortgage lending softens.

Canadian officials and economists have repeatedly warned that the housing market is overheated and consumer debt load are too high.

Consumers have taken advantage of ultra low interest rates since the recession to heap on low-cost debt. The Bank of Canada decided earlier this month to keep its overnight lending rate — which affects prime rates at banks — at one per cent to stimulate a still fragile economy.

However, Mark Carney, the central bank governor has issued repeated warnings that the plan comes with a consequence that could spell economic trouble in times ahead. The most overstretched consumers could find themselves sunk if interest rates rise.

With household debt at an all-time high above 150 per cent of income, the Bank of Canada has declared it the number one domestic risk to the economy.

Moody's Investors Service in April said Canada's banks are collectively the soundest in the world and recommended the financial institutions to jittery global investors.

Unlike counterparts in the U.S. and Europe, Canadian banks suffered no failures during the 2008-09 financial crisis.