Downgrade would have small impact: RBC

Canada’s financial sector is ranked as one of the world’s best, says a Bloomberg Markets ranking that placed four of Canada’s banks among the world’s strongest.

But, RBC also made a much less desirable list; Moody’s tally of 17 banks and firms that may soon face downgrades to their long-term credit ratings.

The listed firms face challenges not captured in their current ratings, says Moody’s. These challenges include more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions.

“These difficulties have diminished the longer term profitability and growth prospects of these firms,” said Moody’s in a recent press release.

Gordon M. Nixon, president and CEO of RBC, isn’t too worried. Speaking at Bloomberg’s Canada Economic Summit, he said, “RBC is one of the highest level institutions in Canada and growth has been steady.” If the bank’s credit rating is downgraded, he expects it’ll have small effect.

“If we’re brought down a notch, we’ll just be par with other banks in the country,” says Nixon. “We want to stay on top though, so it’s far from a desired outcome.”

Nixon’s says Canada has a great fiscal and banking model, and that won’t change. Growth in the financial sector has been strong since the recession and, despite current global challenges, will continue if banks take the right steps.

“To sustain growth, banks and institutions have to make sure they remain well-managed,” says Nixon. “Assume some growth, but also consider the possible downside risks of unbalances around the world.”

He adds, “Consider the cost of regulation and be aware of challenges from all possible markets. Be conservative, but continue to deploy capital and generate reasonable returns for your clients.”

Following the 2008 crisis, RBC has completed several sales and acquisitions to strengthen their institution. They bought the remaining half of Dexia in April 2012 and acquired BlueBay Asset Management in 2010.

When asked if more transactions were in the works, he says, “all of our acquisitions have been tactical. Firms need to be disciplined and consider the overall benefits of every possible deal. Look at the risks versus the returns, and always strive to fill holes in your business.”

Nixon doesn’t expect any banks to make large transformational changes in the near future. Institutions will keep conservative balance sheets and focus on slow but steady growth in the coming year, he says.