Low angle view of Skyscrapers in downtown Toronto during the day

Rising interest rates generally benefit banks by improving net interest margins, but the Canadian banks may benefit less than firms in other markets amid higher asset risks, says Fitch Ratings.

In a new report, the rating agency said banks in Canada and Germany are more vulnerable to downside asset risks as rates rise, Fitch said.

“We do not anticipate them benefiting from revenue uplift from the rate environment as much as other countries,” it said.

The potential for Canadian banks to grow margins and revenues is “more limited” than in the U.S. “due to higher pressure to raise deposit rates and reliance on wholesale funding, which is rate-sensitive,” Fitch said.

At the same time, Canadian households are highly leveraged, the report noted.

“Affordability strains arising from higher rates and higher inflation are a key risk for bank asset quality,” it said, noting that 40% of residential mortgage loans were uninsured (as of June 30), and that mortgages account for around 75% of household debt.

However, factors such as stringent mortgage stress tests, low mortgage loan-to-value ratios, and high credit scores are “mitigating credit quality concerns at the largest banks,” Fitch said.

On the corporate side, liquidity ratios “compared favourably to pre-pandemic levels,” it said.