Canadian banks have been downgraded by Moody’s Corporation (NYSE:MCO). Just last month the banks were showing signs of resilience, but Moody’s does not see Canada’s banks the same way analysts at National Bank Financial (NBF) did when they issued their report in December.


BMO Capital Markets analysts issued a report to investors saying they weren’t surprised that Moody’s downgraded the banks. It lowered the senior debt ratings and the subordinated debt ratings of Canada’s six largest banks: Bank of Montreal (USA) (NYSE:BMO), The Bank of Nova Scotia (NYSE:BNS) (TSE:BNS), Caisse Centrale Desjardins (CCD), Canadian Imperial Bank of Commerce (NYSE:CM) (TSE:CM), National Bank of Canada (TSE:NA) and Toronto-Dominion Bank (NYSE:TD) (TSE:TD).

Moody’s lowered the senior debt ratings of those banks by one notch and the subordinated debt ratings by three notches, one for their bank financial strength rating and two for the removal of government support.

The rating agency also lowered the sub debt ratings of National Bank of Canada (TSE:NA) by four notches and hybrid ratings by one notch for most banks but two notches for National Bank of Canada. Moody’s downgraded Royal Bank of Canada (NYSE:RY) (TSE:RY)’s senior ratings back in June, and it reaffirmed those ratings but lowered the bank’s subordinated debt ratings by two notches. Moody’s also affirmed the short-term Prime-1 ratings of all the banks.

According to Moody’s, the downgrades of Canada’s largest banks indicate several current market conditions affecting the nation right now. Consumer debt levels and housing prices are both high right, and there are system-wide downside risks to the nation’s economic environment. The rating agency also said three of the banks are exposed to the capital markets business, while the other three have other concerns. It also said the banks rely too much on wholesale funding.

Analyst at BMO Capital Markets said they view the ratings downgrades “as more of a realignment exercise following the top-notch downgrade to Royal Bank’s ratings in June.” They also don’t believe bank credit spreads in Canada will be impacted much by the action and point out that Canada’s bank debt ratings are still “one of the highest in the world.”