As the big Canadian banks adapt to the effects of higher interest rates, Fitch Ratings has upgraded their rating outlook to neutral for 2024.

The shift in the outlook to neutral from deteriorating reflects the sector’s acclimatization to the “higher for longer” interest rate environment, the rating agency said.

“With the current economic backdrop and slower normalization of credit quality, we expect Canadian bank profitability to stabilize,” said Maria-Gabriella Khoury, senior director at Fitch, in a release.

Overall, bank profits will be challenged by weak loan growth and a soft investment banking market that might weigh on revenues, the firm said.

Additionally, asset quality is expected to continue deteriorating, as households grapple with high inflation and rising interest costs.

“High levels of Canadian household debt remain a key credit concern,” Fitch said.

However, it also expects that these trends will be offset by improved asset yields and operational efficiencies.

At the same time, it’s expected that banking regulators will continue to tighten “around the margin,” Fitch said, noting that the Basel III requirements for market risk and credit valuation adjustment risk take effect in early 2024.