Fitch Ratings Inc. has revised its outlook for the Canadian banking sector in a new report to stable from negative despite expectations of deteriorating credit performance and rising downside risks.
The banks’ strong fundamentals, “including solid risk management, sound capital and consistent performance,” support their credit profiles in 2017, the credit-rating agency says. Thus, it revised its outlook for the sector upward, “reflecting our views on overall industry performance trends.”
The risks facing the banks “should be manageable,” the Fitch report says, even as the firm sees earnings growth, mortgage lending and asset quality all coming under pressure next year. Canadian banks’ credit performance is “likely at a cyclical peak, with a combination of macroeconomic and housing market trends pointing to some credit reversion in 2017,” the Fitch report adds.
In addition, the ongoing threat of high household indebtedness and an inflated housing market mean that the banks remain sensitive to a severe housing market correction.
However, solid risk management and a good capital positions “should act as key protective buffers for banks’ credit profiles,” the Fitch
report says, adding that the banks’ credit standing is also bolstered by their resilient business models and backed by solid franchises.
Moreover, the latest regulatory changes that the federal government introduced designed to cool the housing market will likely be a long-term positive for the banks, the Fitch report says. Although these reforms will likely slow mortgage lending in the near term, Fitch sees these changes, particularly a change to mortgage insurance policy, as a long-term positive.
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