The outlook for the Canadian banking sector in the year ahead is stable, Fitch Ratings says in a new report.

The rating agency says that it expects Canadian bank earnings to remain sound and credit costs to be manageable, with both solid liquidity and affordable access to capital markets. Retail loan growth within Canada, which was a meaningful driver of revenue growth in 2010, is expected to slow, yet remain positive. Fees and commissions from wealth management are forecast to remain fairly stable.

As non-Canadian banks continue to rebound financially, Fitch says that the Canadian banks’ comparative advantage in the global capital markets is likely to narrow. “Nonetheless, funding is expected to remain plentiful and inexpensive, particularly within their domestic market,” it says.

Additionally, Fitch expects that the banks’ capital levels will decline modestly, yet remain strong relative to global peers. There is some uncertainty about the precise impact of changes to the global capital rules, although Fitch believes the Canadian banks are well positioned to adapt to the new requirements well within the phase-in period.

The banks will also have their challenges, the rating agency says. Fitch notes that most of the major banks have recently made or announced acquisitions that will likely reduce efficiency, at least until integration is partially complete.

They will also be challenged by the required shift to international accounting standards, Fitch says. The rating agency adds that household debt levels could present challenges to the banks, particularly if interest rates and/or unemployment levels were to spike, although it places a very low probability on this happening.

With most of the major Canadian banks already rated quite highly, Fitch says there are few factors that could improve the sector outlook to positive.

A negative outlook is most likely to be caused by meaningful simultaneous deterioration in several key macroeconomic factors such as unemployment and interest rates, Fitch says.

IE