Fitch Ratings has affirmed its ratings on the big six Canadian banks and Caisse Centrale Desjardins following a peer review, the New York-based credit rating agency announced on Monday.
Although the Canadian banking sector “is likely at an inflection point in terms of performance”, Fitch still expects that the Canadian banks “will continue to compare favourably versus global peers, which continues to support their high ratings level,” the rating agency says in a report.
Fitch remains cautious on the sector, given the negative macro-economic trends, which leave all of the Canadian banks “vulnerable to credit deterioration in their domestic loan portfolios,” the report says. Those negative trends include record consumer debt levels, and Fitch’s belief that the Canadian housing market is overvalued by over 25%.
“For now, these risks have been manageable given the steady unemployment rate, low interest rate environment, and low inflation,” the Fitch report says. “However, should the rapid decline in global oil and gas prices pressure the broader economy in Canada that leads to a sharp rise in unemployment, Fitch believes credit deterioration could be hastened.”
For now, the Canadian banks direct exposure to oil and gas lending “appears manageable,” the report says. However, it notes that the banks “could still be susceptible to losses should the oil price find an equilibrium point much lower than stress tests have indicated and if it takes multiple years for oil price to recover.”
Fitch has maintained its stable outlook on the ratings for Bank of Montreal, Canadian Imperial Bank of Commerce, Toronto-Dominion Bank, Bank of Nova Scotia, National Bank of Canada and Caisse Centrale DesJardins. The outlook for Royal Bank of Canada (RBC) has been revised to negative from stable, given its concern that RBC’s “credit performance and future earnings volatility may be higher than Canadian bank peer averages as well as in comparison to similarly rated global financial institutions.”