The outlook for Canada’s banking system has been revised to stable from negative, reflecting the introduction of new bail-in rules as well cooling housing markets, New York-based Moody’s Investors Service says in a report published Wednesday.
“With the implementation of Canada’s new resolution regime and introduction of bail-in rules, we lowered our government support assumptions for the rated banks’ deposits and senior debt, a change we anticipated in the previous negative outlook on the system,” says David Beattie, senior vice president at Moody’s, in a statement. “The return to a stable outlook reflects the steady underlying credit strength of the Canadian banks at current, revised support levels.”
Over the next year and a half, Moody’s expects the Canadian banks to benefit from the underlying economic and institutional strength of the system.
“The banks’ superior historical asset quality, favourable industry structure and strong recurring earnings will provide a buffer from the asset risk entailed by high and increasing consumer leverage in the system and elevated housing prices in the greater Toronto and Vancouver markets,” Moody’s says in a news release, and the banks have strong capital and liquidity positions, with common equity Tier 1 capital ratios averaging about 11.4% in the second quarter.
Trade tensions remain a key downside risk to the outlook. the strength of Canada’s economy is tied to U.S. trade relations. “Bank asset quality could be downwardly pressured owing to uncertainty involving global trade , including NAFTA,” Moody’s says.
Additionally, high household debt levels remain an ongoing risk for the banks.
“Private-sector debt to GDP has presented an ongoing risk to Canadian banks’ asset quality and profitability and was up to 187.5% as of the end of 2017 from 184.5% in 2016,” Beattie says.
“Mortgage growth for the past three years was 9.1%, while consumer credit grew at a more moderate 6.3%. However, leading indicators point to some relief as the growth in household debt is abating and the rise in the housing price index for major urban centers is moderating,” he says.