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Should I Be Worried About the Big 6 Bank Downgrades?

Written by Joe Snyder

Thursday, May 25th, 2017

Q:

Should I be worried about the recent Big 6 Bank downgrades?

 

A:

Whenever there's a downgrade, it's worth looking into.

When all of them are downgraded at the same time, that seems to point to a systemic issue. So let's understand what the underlying issue is.

The primary reason the big 6 banks were downgraded on May 10 was that the rating agency, Moody's Investor Service, Inc. felt that credit conditions in Canada were worsening, driven by record high private debt levels that continue to rise along with housing prices. The risk to the banking system is if consumers start defaulting on their debt obligations, the bank's assets (loans) won't be worth as much. This is something that still resonates very strongly in light of the 2008 credit crisis.

What Should I Be Doing?

I'd suggest that when things like home prices and consumer debt levels make headline news on a very regular basis, it's smart to consider your own financial health. Canadians' debt-to-disposable income is currently at a record 167%. This means that for every after-tax dollar of income, the average Canadian owes $1.67. You could use that as a benchmark, but could also just ask yourself if you're comfortable with your current debt obligations. Are you able to pay off your credit card(s) every month, or do you usually carry a balance? Do you have an outstanding balance on a line of credit? Are you financing your car? Are you saving as much as you should be for retirement or other goals?

It's Also a Good Idea to Take a Look at Your Investment Portfolio

One of the biggest wake-up calls for many investors during 2008 was that they didn't have a proper investment mix (asset allocation) — they were too heavily invested in stocks and under-invested in bonds. The result is that their investment portfolios suffered more than they needed to. A good rule of thumb for your retirement portfolio is to hold bonds equal to your age with the rest in stocks (so if you're 40, for example, then you'd have 40% invested in bonds with the remaining 60% invested in stocks).

So What's Going to Happen?

No one knows, of course. But the current combination of factors below doesn't seem sustainable:

  • Low borrowing rates have led to people borrowing more and being able to afford larger mortgages

  • Housing prices have increased astronomically year-over-year in many cities

  • Savings accounts and GICs are paying very little interest

  • Paying down mortgage debt at such low borrowing rates doesn't seem necessary

  • Investors are turning toward higher-yielding investments like stocks

  • Stock markets continue to experience a tremendous bull run, producing above-average returns

My Recommendations

Use things like bank downgrades as a reminder of the importance of assessing your own financial situation. Let it serve as a reminder that even though we've seen things like 30% year-over-year house price increases and 20% stock market returns, no market continues upward indefinitely.

Watch your spending habits, pay down debt — yes, even if rates are low — and continue investing in an appropriate mix of stocks and bonds aligned with reaching your goals.


If you have a question Joe can answer in a future article or a topic suggestion, please email it to: askanadvisor@tangerine.ca

This article is intended to provide general information only. If you need further information about your specific circumstances you should speak to an investment advisor.

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