Canada is joining the rest of the world as its banks underperform their global counterparts due to record consumer debt and a weakening housing market. They now risk a credit downgrade. Standard & Poors (S&P) already cut the ratings of 27 Canadian banks on July 27, including the Royal Bank of Canada and Toronto-Dominion Bank, based on long term housing price increases and skyrocketing consumer debt.
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Canadian financial companies’ debt is second only to Japan on a list of 35 global peers for worst performing debt. If housing prices began to drop, analysts say consumers would begin to pay down their debt. But prices continue to rise as consumers continue to overleverage themselves.
Since the Canadian economy is also feeling the effects of the global economy, a change may be coming sooner than later. The growing potential for distress based on consumer indebtedness is behind the ratings cuts.
S&P said it will continue to monitor government policies and regulatory initiatives to curtail the growth of systemic risk from the housing sector as well as the performance of Canadian financial institutions relative to their global peers.
Canadian banks were ranked among the world’s strongest in May by the World Economic Forum. They held four of the top 10 spots in Bloomberg’s annual rankings released in May. Canadian analysts say that, because of the ratings downgrades
, the market is already discounting the possible fallout from a turn in housing prices.