Moody’s downgraded by one notch all Canadian covered bond issuers except RBC yesterday (Monday) because of concerns about the banks’ exposure to heightened consumer indebtedness and elevated housing prices, although Fitch yesterday affirmed five of the same banks.

Moody’s rating actions follow a review initiated on 26 October. The new ratings are on stable outlook, including that of Royal Bank of Canada (RBC), which Moody’s affirmed at Aa3.

The six downgraded banks were cut as follows:

• Bank of Montreal, from Aa2 to Aa3

• Bank of Nova Scotia, from Aa1 to Aa2

• Caisse centrale Desjardins, from Aa1 to Aa2

• Canadian Imperial Bank of Commerce, from Aa2 to Aa3

• National Bank of Canada, from Aa2 to Aa3

• Toronto-Dominion Bank, from Aaa to Aa1

“Today’s downgrade of the Canadian banks reflects our ongoing concerns that Canadian banks’ exposure to the increasingly indebted Canadian consumer and elevated housing prices leaves them more vulnerable to unpredictable downside risks facing the Canadian economy than in the past,” said David Beattie, a Moody’s vice president.

However, the rating agency noted that despite these rating actions rated Canadian banks have “noteworthy credit strengths” and remain among the highest rated banks in its global rating universe.

Factors citing by Moody’s as influencing the downgrades include an increase in downside risks to the Canadian economy and Canadian banks’ reliance on confidence-sensitive wholesale funding.

It noted that by the end of September Canadian household debt to personal disposable income reached a record 165%, with growth in consumer debt driven by rising house prices, which have increased around 20% since November 2007. The country’s open, commodity-oriented economy is exposed to external macroeconomic risks, it added, and the Canadian banks’ reliance on wholesale funding increases their vulnerability to financial markets turmoil.

Royal Bank of Scotland analysts said the covered bonds issued by the Canadian banks are rated Aaa by Moody’s and that a Timely Payment Indicator (TPI) leeway ranging from three to five notches means it is highly unlikely that the bonds’ ratings will be cut by Moody’s as a result of the rating action on the issuers.

Fitch yesterday affirmed the six largest Canadian banks by assets, which excludes Caisse central Desjardins but includes RBC, following a peer review committee.

Bank of Montreal, Bank of Nova Scotia, CIBC and Toronto Dominion are rated AA-, National Bank is rated A+ and Royal Bank of Canada AA. The ratings are on stable outlook.

Fitch said that the rating affirmations and stable outlooks reflect sound capital levels, high asset quality, continued earnings stability, strong funding and liquidity positions and favourable metrics relative to comparably rated international peers.

“These strengths are counterbalanced by continued risk with respect to the Canadian residential housing market, increasing consumer debt levels, global economic headwinds, slowing loan growth, margin compression and heightened competition,” it added.