With Canadian banks likely facing declining asset quality and diminishing government support, the credit outlook for the sector is negative heading into 2016, says a new report from Moody’s Investors Services.

Although Canada’s banks remain among the most highly rated in the Moody’s rated universe, the credit rating agency expects them to face increased challenges in 2016, “as asset quality risks increase and governmental support remains uncertain and will likely decrease,” the Moody’s report says.

Bank profits are expected to be stable despite low oil prices and low interest rates, the Moody’s report says, but “mounting financial strain on the country’s households” could lead to declines in asset quality.

See: Slideshow: 2015 bank profits

See: Earnings: Banks defy sluggish economy

“Canadian households continue to take on higher levels of debt and this has implications for Canadian banks,” says David Beattie, senior vice president at Moody’s, in a statement. “High household debt makes non-mortgage consumer loans, like credit cards and auto loans, vulnerable to rapid deterioration in the event of an economic shock and this could lead to higher losses for the banks.”

That said, Moody’s report notes that the Canadian banks have solid capital positions, stable earnings, and relatively few problem loans, which should help them mitigate any increase in credit costs and withstand stress in 2016.

Along with concerns about asset quality, the banks are also facing uncertainty about the likelihood of government support in the event that one of them runs into solvency trouble, the Moody’s report notes. The prospect of government support is likely to diminish as Canadian policymakers continue to work to adopt measures designed to prevent future taxpayer bailouts, the Moody’s report says, adding that this trend is also a factor putting downward pressure on support assumptions for Canadian banks.

“Ambiguity regarding bank resolution and recovery continues to weigh on the Canadian banking system outlook,” says Beattie. “The proposed framework for a bail-in regime for domestic systemically important banks suggests lower likelihood of government support once finalized.”

The negative outlook for the Canadian banking system reflects this global trend to reducing government support, along with the increasing asset risk, the Moody’s report says.