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On Wednesday, May 10th/2017 Moody Investor Services, the leading provider of credit ratings, capital market research, and risk analysis, downgraded all six big Canadian banks’ credit rating: TD (TSX: TD), BMO (TSX: BMO), Scotiabank (TSX: BNS), CIBC (TSX: CM), National Bank (TSX: NA), and RBC (TSX: RY).
The main culprit for the downgrade is debt. Household debt has hit a record high of 167.3% of disposable income. Disposable income is the the money remaining after the deduction of taxes and other mandatory charges. In combination with increased housing prices across Canada, consumers and banks are right now more vulnerable to economic downturn than ever in the past.
An important piece to note is that the downgrade was not due to anything the banks have done but rather due to external factors. So what does it mean for banks and consumers?
Well a lower credit rating for a bank means it costs more for them to borrow money which affects their bottom-line profits. To mitigate for this banks will typically either increase interest rates and/or bank fees.
Moody’s downgrade signals at the large amount of extrinsic risk that could affect the Canadian economy. Important pieces to have on Canada’s economic radar are NAFTA, consumer debt-to-income ratio, and housing affordability.