NEW YORK—The Royal Bank of Canada (RBC), Canada’s biggest bank by assets, was downgraded Monday by credit ratings firm Moody’s Investors Services Inc.
RBC, which has aggressively expanded the size of its investment banking operations, lost its Aaa rating on Monday. Moody’s downgraded the bank’s rating by one notch to Aa1 on risk management concerns and earnings volatility due to its growing investment banking business.
The Toronto-based bank has a large and stable deposit base in Canada but has moved to expand in recent years into the investment banking space—via its subsidiary RBC Capital Markets—to better compete with global rivals, such as Citigroup Inc. and JPMorgan Chase & Co., and Canadian competitors Toronto-Dominion and CIBC.
“Shareholders and bank managers are attracted to the growth potential of capital markets businesses, but these businesses can expose bank bondholders to hidden tail risks,” said Peter Nerby, Moody's senior vice-president, in a statement.
“At year end 2010, the capital markets segment represented roughly 45 percent of the bank's consolidated balance sheet, and management is attributing roughly 25 percent of the firm's $33 billion in common equity to the capital markets segment,” said Moody’s in a report announcing its ratings cut. “Over the long run, management has signaled that the contribution from capital markets businesses could be as much as 30 percent of overall revenue and earnings through the cycle.”
Moody’s outlook for the bank is stable. The last credit rating change on RBC occurred in March 2007, and the bank was relatively unscathed during the 2008 global financial crisis.
