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RBC Downgrade Coming? Moody's Puts Canada's Largest Bank On Notice

Canada's Largest Bank Faces Downgrade
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CP

UPDATE: The Royal Bank of Canada says it doesn't belong on a list of banks targeted for a possible credit rating downgrade.

"This action does nothing to help investors differentiate between strong banks and weak ones," the bank said in a statement reacting to news that Moody's has placed it among 17 financial institutions that may face a downgrade in the near future. "RBC's credit rating and capital base are among the strongest of all banks globally."

Moody's downgrade was a reflection of the credit rating agency's concerns about the health of capital markets businesses. RBC noted that capital markets account for only a quarter of its activities.

The Royal Bank of Canada is among 17 financial firms that Moody’s ratings agency has listed as being at risk of a downgrade.

It’s the second time in two months that Canada’s largest financial institution has faced a downgrade from Moody’s and it highlights concerns among some observers that Canada’s banking sector is not immune from the credit crunch that has enveloped the global economy.

“These firms face challenges that are not fully captured in their current ratings,” Moody’s stated in a note released Wednesday. “Capital markets firms are confronting evolving challenges, such as more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions.”

Moody’s downgraded RBC one notch in December, from Aaa to Aa1, and in its note Wednesday warned the bank faces another downgrade of two more notches.

Other banks under review for downgrades include Citigroup, Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley. Moody’s also extended ongoing reviews for downgrades on 11 companies.

The announcement comes just days after the ratings agency said that it was cutting the ratings of Italy, Portugal and Spain because of uncertainty over the eurozone’s ability to enact reforms necessary to dig out of its debt crisis and Europe’s weakening economy.

Canada’s banks have been lauded in recent years for largely avoiding the credit crisis that has enveloped many U.S. and European banks, and Canada’s regulatory structure has been praised for helping to maintain a stable banking sector.

But some observers have questioned whether Canada’s banks are as sound as they appear. In a controversial note last summer, the influential Zero Hedge blog argued that Canada’s banks could be in financial trouble if the value of their assets drops.

Zero Hedge said Canadian banks’ tangible common equity ratio -- a measure of financial stability -- was among the lowest in the world, making them prime candidates for financial difficulties in case of another downturn.

But others argued that Zero Hedge was ignoring the quality of Canadian banks’ assets, and if that is taken into account, Canadian banks are among the safest.

Moody’s downgrade warning evidently did not come out of the blue. According to analysts at CreditSights, Moody’s had warned of this move before.

"For the past two years, the big banks/brokers have been repositioning their funding activities in advance of these potential rating agencies' adverse actions," CreditSights wrote.

In its note Wednesday, Moody’s also said it is extending its reviews on whether to lower ratings on Credit Suisse, Macquarie, Nomura, UBS, Barclays, BNP Paribas, Credit Agricole, Deutsche Bank, HSBC, Royal Bank of Scotland and Societe Generale.

With files from the Associated Press

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Canada's Highest-Paid CEOs
10: Jonathan Henry, Gabriel Resources $11.7M(01 of10)
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Gabriel Resources is a Toronto-based company focused primarily on a gold excavation project in Romania. Note: An earlier version of this gallery reported that Gabriel Resources' 2010 revenue was $448 million. It was, in fact, $448,000, according to publicly listed data. A company spokesperson says the resource firm was in a period of pre-production in 2010, and did not generate revenue. Thus, Henry's compensation of $11.7 million exceeded the company's revenues for the year. (credit:Gabriel Resources)
9: Gordon Nixon, RBC $11.9M(02 of10)
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Royal Bank of Canada (RBC) is the largest financial institution in the country. Henry's total pay of $11.9 million was the equivalent of 0.1 per cent of the company's $10.3 billion in 2010 revenues. (credit:CP)
8: Stephen DeFalco, Nordion $13.1M(03 of10)
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Nordion is an Ottawa-based health sciences company that specializes in medical isotopes. DeFalco's total pay of $13.1 million was the equivalent of 5.1 per cent of the company's $256 million in 2010 revenues. DeFalco left the CEO position in 2010. (credit:CP)
7: Steve Laut, Canadian Natural Resources $13.1M(04 of10)
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Canadian Natural Resources Ltd. is a Calgary-based oil and gas exploration company. Laut's total pay of $13.1 million was the equivalent of 0.08 per cent of the company's $14.6 billion in 2010 revenues. (credit:CP)
6: Richard Waugh, Scotiabank $13.8M(05 of10)
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The Bank of Nova Scotia is the third largest bank in Canada. Waugh's total pay of $13.8 million was the equivalent of 0.06 per cent of the company's $23.8 billion in 2010 revenues. (credit:CP)
5: Martyn Konig, European Goldfields $14.8M(06 of10)
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Despite its name, European Goldfields in a Canadian-based company, operating out of the Northwest Territories. Konig's total pay of $14.8 million was the equivalent of 29.1 per cent of the company's $50.7 million in 2010 revenues. (credit:Screencap)
4: Edward Sampson, Niko Resources $16.5M(07 of10)
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Niko Resources is a Calgary-based oil and gas exploration company operating fields mostly outside Canada. Sampson's total pay of $16.5 million was the equivalent of 3.6 per cent of the company's $455 million in 2010 revenues. (credit:Niko Resources)
3: Siegfried Wolf, Co-CEO, Magna $16.5M(08 of10)
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Southern Ontario-based Magna International is North America's largest car parts manufacturer. Wolf's total pay of $16.5 million was the equivalent of 0.07 per cent of the company's $24.2 billion in 2010 revenues. Wolf stepped down as co-CEO in 2010. (credit:CP)
2: Donald Walker, Co-CEO, Magna $16.7M(09 of10)
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Southern Ontario-based Magna International is North America's largest car parts manufacturer. Walker's total pay of $16.7 million was the equivalent of 0.07 per cent of the company's $24.2 billion in 2010 revenues. (credit:CP)
Frank Stronach, Magna $61.8M(10 of10)
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Southern Ontario-based Magna International is North America's largest car parts manufacturer. Stronach's total pay of $61.8 million was the equivalent of 0.26 per cent of the company's $24.2 billion in 2010 revenues. (credit:CP)

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