The warnings are piling up for the Canadian banks, as New York City-based Fitch Ratings cautions that it sees possible trouble ahead for bank earnings amid economic weakness.
Canadian banks “are likely at an inflection point due to macroeconomic challenges,” says a Fitch report published on Monday.
In particular, the report says the Canadian economy overall will be “facing challenges” if oil prices remain ‘lower for longer’ and, that this poses new risks to the big banks.
See also: Deepening oil slump raising potential losses for Canadian banks: Moody’s
“So far Canadian banks have been resilient and the oil slump has appeared manageable but as falling commodity prices permeate the broader economy, banks will begin to feel pressures beyond direct energy loan exposure,” says Doriana Gamboa, senior director at Fitch Ratings, in a statement.
While the rating agency believes that the banks’ direct exposure to the energy sector is manageable, the report says that there may be follow-on effects in the economy at large, and on employment rates specifically. As a result, banks “could face credit issues in their retail lending portfolios given high consumer indebtedness,” the report says.
“Due to the stable Canadian economy over the last few decades, Canadian banks have taken little to no loan provisions over the years. As we move into an uncertain and ‘lower for longer’ oil price period, Fitch expects to see weakness in loan growth and a rise in provisions for credit losses,” says Gamboa.
Additionally, Fitch views Canada’s housing markets as overvalued in real terms by approximately 20% on a national basis. A housing market correction would negatively impact the banks, the report says, although it notes that much of their mortgage exposure is guaranteed by the CMHC.
“Bank profits will be challenging moving forward in 2016 and Canadian banks will likely report modest loan growth, higher credit costs and continued net interest margin pressures,” the report concludes. “As Canadian banking market shares are mature and relative stable, and as the Canadian economy has started to slow, many of the banks have started to expand into new markets and growth areas such as wealth management and capital markets businesses. This could, however, increase some of the banks’ risk profiles and potentially drive negative rating changes.”