Barclays downgrades stocks of Canada's 3 biggest banks over economic concerns

A view of Barclay's headquarter at London's Canary Wharf financial district, Thursday, June 28, 2012. (AP / Lefteris Pitarakis)

TORONTO -- Barclays has downgraded its stock ratings for three of Canada's biggest banks, citing concerns about how they'll be affected by a slowdown in the country's economy as a result of the recent drop in global oil prices.

Analyst John Aiken lowered ratings for Bank of Montreal (TSX:BMO), Royal Bank (TSX:RY) and TD Bank (TSX:TD) to underweight, from equal weight, noting that consumer borrowing, the main profit driver for Canada's banks, will likely slow even more than previously expected.

In addition to the downgrades for the three major banks, Aiken also downgraded Montreal-based Laurentian Bank (TSX:LB) to underweight.

He says the sharp decline in the price of oil will be a negative for the country overall, with the potential for recession in Alberta offsetting any of the benefits, such as lower gasoline prices.

Aiken also says the Bank of Canada's surprise interest rate cut on Jan. 21 -- to 0.75 per cent from one per cent -- will put pressure on the commercial banks' lending margins, which will hamper their earnings growth.

Canada's biggest commercial lenders have only partially passed along Bank of Canada's rate cut, reducing their prime lending rates by only 15 basis points instead of the full 25.

He wrote in a note to clients that Barclays doesn't anticipate a "significant uptick" in demand for consumer loans and said it's likely the banks margins will be squeezed incrementally.

"As a result, our reduced estimates imply low single-digit earnings growth for 2015."