RBC Down Grade, again?

Just over a year after it was initially downgraded, Royal Bank of Canada is at risk of another slash to its credit quality as Moody’s Investors Service reviews all major global banks with big capital markets divisions.

The rating agency has initiated a review of 17 banks and securities firms with global capital markets operations because it feels that the risks associated with these divisions “are not fully captured in their current ratings.”
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“Capital markets firms are confronting evolving challenges, such as more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions,” the rating agency said. “These difficulties, together with inherent vulnerabilities such as confidence-sensitivity, interconnectedness, and opacity of risk, have diminished the longer term profitability and growth prospects of these firms.”

“Rapidly changing risk positions expose these firms to unexpected losses that can overwhelm the resources of even the largest, most diversified groups.”

RBC was already dinged for its exposure to capital markets in December 2010, when Moody’s downgraded its credit rating to Aa1 -- which is stil a stellar rating.

But much has changed since then, and Moody’s thinks its worthwhile to re-evaluate.

“The combination of changed operating conditions and increased regulatory requirements and restrictions has diminished these firms' longer-term profitability and growth prospects,” the agency said. “While we had initially expected their standalone credit profiles to recover once the acute phase of the crisis had passed, we now view these challenges as structural features of global investment banks.”

In an e-mailed statement, RBC said it was “surprised” to be included in the review and the banks believe is inclusion “is unwarranted.”

“This action does nothing to help investors differentiate between strong banks and weak ones. RBC’s credit rating and capital base are among the strongest of all banks globally,” RBC said. “Over the past three fiscal years, our capital markets business has been consistently profitable and represents less than 25 per cent of RBC's earnings.”

10 of the 17 firms that Moody’s will inspect have been her placed on review for downgrade, or had their reviews for downgrade extended. Along with RBC (RY-T53.24-0.12-0.22%), the firms placed under review include U.S. giants such as Bank of America (BAC-N8.03-0.06-0.74%), Citigroup (C-N32.990.280.86%), and JPMorgan Chase (JPM-N38.480.481.26%).

Moody’s goes so far as to break the firms it will review into different categories, with some susceptible to one-notch downgrades, and others susceptible to more. RBC is susceptible to two-notch downgrades, while Credit Suisse, Morgan Stanley and UBS could all face three-notch downgrades.

CMHC 2012 Predictions.

Canada's housing market will remain stable for at least two more years, Canada Mortgage and Housing Corp. predicted Monday, with the expected slow growth in the economy keeping house prices in check.

CMHC, the Crown corporation that insures Canadian mortgages, expects little change during 2011 in prices and sales of existing homes, as well as little change in new home construction.

Mathieu Laberge, deputy chief economist at the agency, says low interest rates will keep buyers buying, but the slow economy will put a damper on any price hikes.

"With the Canadian economy set to expand at a moderate pace and mortgage rates expected to remain low, activity levels in 2012 in both new home construction and sales of existing homes will stay close to levels seen in 2011," Laberge said in a CMHC statement.

Mortgage rates will remain flat through most of 2012, CMHC predicts, and start increasing moderately in late 2012 or early 2013.

The average house price across the country will hit $368,900 for 2012. By 2013, it will be $379,000.

Around 457,300 existing homes are expected to change hands in 2012, moving a little higher in 2013 to 468,200 units.

Housing starts are expected to be around 190,000 units this year and 193,800 units in 2013, the CMHC also predicted.

Over 2012, CMHC expects Canada's six eastern provinces will see a contraction in housing starts. By 2013, however, modest growth will return to Quebec and Ontario, they say.

All four western Canadian provinces will see growth in housing starts in 2012, with Alberta leading the way at 13.2 per cent. In 2013, the western provinces except Saskatchewan will see positive growth; Saskatchewan's total starts are expected to contract by 2.7 per cent.

Low mortgage rates have driven demand in the housing markets for years now, causing house prices to rise sharply, particularly in big cities such as Toronto and Vancouver.

Even as the economy has slowed in recent years, the housing market has seen little change. Price growth has slowed in most areas, but not retreated.

Last month, BMO economists suggested Canada would likely avoid a serious housing market crash, with the possible exception of Vancouver.

That analysis, by BMO economists Sherry Cooper and Sal Guatieri, suggested that most markets are more likely to cool rather than collapse over the next couple of years.

The one exception, they said, would be Vancouver and parts of B.C., which will likely experience a more severe correction, because demand from non-resident Chinese investment has been driving up prices.

Top 10 Large Home Ownership Markets in the USA

   Location                                        Median Home Price 
    Honolulu HI                                                $ 489,200
    Washington-Arlington-Alexandria DC       $ 384,900
    Santa Barbara-Santa Maria CA                   $ 395,300
    Oxnard-Thousand Oaks-Ventura CA         $ 389,000
    San Luis Obispo-Paso Robles CA              $ 393,700
    Barnstable Town MA                                 $ 364,000
    Ocean City NJ                                            $ 358,700
    Santa Rosa-Petaluma CA                           $ 344,500
    Naples-Marco Island FL                             $ 229,300
    Olympia WA                                              $ 214,700

The analytics above compute expected appreciation, cost of ownership and projected return on investment upon sale of the property in 10 years, and adjust them for expected risk associated with volatility of home prices in the market. The highest score was for Naples-Marco Island, Fl.