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

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