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Moody's Text: Canadian Banks' Outlook Remains Negative

     OTTAWA (MNI) - Following is a press release issued Wednesday By Moody's:
     Canadian banks' outlook remains negative on lowered government support
assumptions
     The outlook for the seven largest Canadian banks remains negative, driven
by the likelihood the credit rating agency will lower its government support
assumptions once the government's proposed bail-in regime is finalized, Moody's
Investors Service says in a new report.
     In June, the Canadian government introduced preliminary rules enhancing
powers of the Canadian Deposit Insurance Corporation (CDIC) as the resolution
authority for domestic systemically important financial institutions (D-SIFIs)
and outlining powers of the Office of the Superintendent of Financial
Institution's (OSFI) to set and administer the requirement for D-SIFIs to
maintain a minimum capacity to absorb losses in a resolution.
     "We believe the new Canadian regime will maintain the critical services of
the D-SIFIs, while imposing by statute explicit burden-sharing on eligible
liability holders," according to David Beattie, a Moody's Senior Vice President.
     Moody's expects a more challenging operating environment for Canadian banks
during the outlook period, which could erode the banks' asset quality and
increase their sensitivity to external shocks, especially given the high and
rising level of private-sector debt/GDP. However, banks will continue to benefit
from underlying strengths, including economic and institutional strength, a
favorable industry structure, superior historical asset quality, and strong
recurring earnings.
     A key vulnerability to Canadian banks is mortgage debt, which has doubled
in the last decade while the index of house prices to disposable income has
increased 25% over this period.
     "Nonetheless, Canadian banks' overall asset quality remains superior to
that of peer systems, as demonstrated by a very low level of problem loans,"
Beattie says. "While banks are extending their lending into higher-risk
non-mortgage lending, we do not expect an overall shift from their current very
high underwriting standards."
     Solid capital levels and strong earnings are expected to buffer banks
against unexpected losses in a stress scenario. Canadian banks system-wide
capital levels are average by international standards, but are supplemented by
the banks' strong internal capital generation. As well, risk-weighted capital
ratios are improving and reached about 11%, as of the third quarter.
--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com
[TOPICS: M$C$$$,MK$$$$,MR$$$$]

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