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Barclays has downgraded its outlook for four major Canadian banks – Bank of Montreal, Royal Bank, TD Bank and Laurentian Bank. Professor Kai Li, the W.M. Young Chair in Finance at Sauder, says it’s a symptom of rough times for Canada’s economy.

 

Why did Barclays decide to downgrade these Canadian banks?

Drops in the price of oil lead to less demand for Canadian commodities, which leads to recessions  - first regionally, as we’re starting to see in Alberta, and eventually nationally. The Bank of Canada's rate cut last week also signals that the central bank is concerned about the overall economic outlook. Canadian banks are the major provider of capital for Canadian firms, and if firms cut spending they will cut borrowing, which will hurt the banks' bottom line. And if consumers lose confidence about the economy, they will cut their own spending and delay or cut down on buying new homes, which further hurts the banks' bottom line.

What does it say about the Canadian economy?

The overall outlook for the Canadian economy is not good. Canadian banks are major players in this economy, so they’re hurt accordingly – as Barclays can clearly see.

Is it a sign of things to come?

It might be. That depends on how low the oil price can go, and how long that low oil price can last. Our biggest trade partner is the United States, so it also depends on the economic recovery south of the border. Lower interest rates in Canada coupled with lower exchange rates – as the Canadian dollar is the lowest it’s been against the U.S. dollar since 2009 – could help our manufacturing business in eastern provinces and could stimulate firms out there to invest more thanks to the lower borrowing costs.