The financial results of the six big Canadian banks have remained strong in spite of a considerable slowdown in mortgage loans and continuing concerns over household indebtedness in Canada, according to Fitch Ratings.
The rating agency says that while it expects a further cooling of housing market trends to put pressure on mortgage performance, capital markets revenue growth is providing support for the banks to boost capital levels while returning cash to shareholders.
Indeed, it notes that each of the big six banks — RBC, TD, Scotiabank, Bank of Montreal, CIBC, and National Bank — reported earnings growth in the first quarter of fiscal 2013, “with strong capital markets revenues and better wealth management unit trends driving much of the improvement.”
“To a large extent, growth in commercial lending, global banking, and wealth management is offsetting mortgage trends and boosting overall bank performance,” it says. “However, the more volatile trends in these businesses, in addition to their sensitivity to global economic conditions, could limit earnings power for the Big Six institutions in coming quarters.”
And, the potential exists for a deterioration in mortgage asset quality trends, Fitch cautions. It also says that credit risks could increase significantly, “if a sharp downturn in employment, commodities, or economic growth causes borrowers’ credit quality to decline and, therefore, adversely impacts housing prices.”
Fitch also says that the Office of the Supervisor of Financial Institutions’ (OSFI) designation of all of the top-six banks as domestic systemically important financial institutions, and the demand that they face a capital surcharge of 1% of risk-weighted assets above previous Basel III requirements (effective in 2016), won’t be an issue.
“We believe the Big Six will have little difficulty in achieving this capitalization target, because their generally strong current capital levels remain comfortably above current Basel III Tier 1 common minimums,” it says.