Piggy bank under umbrella

With economic growth expected to slow next year, the Canadian banks will likely see some deterioration in their financials, says Fitch Ratings.

The rating agency’s outlook for the Canadian banks is neutral for the year ahead, as it expects the banks’ credit fundamentals to largely hold up even as the economic backdrop weakens.

Fitch said the banks’ financial profiles “will moderately deteriorate as unusually benign credit and earnings conditions continue reverting to long-term averages.”

While underlying growth is still expected to be strong next year at 3.7%, that represents a slowing from estimated 5.0% growth this year.

“The post-pandemic recovery will likely extend well into 2022, contributing to healthy earnings from lower provisions, supportive investment banking conditions and recovering credit demand,” said Mark Narron, senior director at Fitch, in a release.

“Over the longer term, we expect a moderately weaker operating environment compared to the pre-pandemic period, characterized by elevated private and public sector leverage and a more vulnerable housing market,” he said.

Risks to the short-term outlook include the impact of new coronavirus variants on growth, inflation, and policy changes, such as a proposed 3% surtax on banks’ profits over $1 billion, Fitch noted.

Long-term challenges include “the risks to mortgage quality from a faster than expected rise in rates, reputational and legal risks related to open banking, and developments around digital assets, including exploratory steps toward the issuance of a digital currency,” it said.