Future earnings growth is going to be tougher to find for the big six Canadian banks, according to a new report from Fitch Ratings.
The rating agency says that, while Canadian bank earnings are expected to remain sound, earnings growth will likely decelerate in 2013, “given the potential slowdown in housing, global economic uncertainty, and renewed competition from refocused international players.”
Future earnings performance will come against a less favourable backdrop, it notes, and Fitch expects earnings growth is likely to moderate. “Retail loan growth, a meaningful driver of revenue and earnings growth, is likely to decline when and if consumers start to deleverage and the housing market shifts to a lower gear. Additionally, a sharp reversal in house values could significantly affect consumer demand for credit and further constrain earnings,” it says.
The main domestic threat to Canadian bank stability is the record level of consumer indebtedness and the risk of overvaluation in the housing market, Fitch says. “The increased vulnerability of Canadian households to an adverse shock could pressure Canadian banks’ ratings should borrowers’ ability to pay weaken due to a worsening of domestic or global economic conditions,” it says.
Indeed, it says that a severe housing market decline could be driven by increased unemployment or interest rates, either of which would affect borrowers’ ability to service outstanding debt. “Catalysts for such changes could potentially include commodity market shocks or other exogenous macroeconomic factors that have contagion effects on the Canadian economy,” it adds.
Fitch says the banks’ capital levels are commensurate with their asset mix and loss experience, and they leave the banks well positioned to withstand a moderate housing stress. Indeed, it views the risk associated with the Canadian housing market and the global economic headwinds to be mitigated by the banks’ solid capital levels, sufficient liquidity positions, and consistent earnings profiles.
Those capital levels may have to be strengthened even further, it says, if the banks are designated as domestic systemically important banks. Yet, Fitch says it believes each of the six banks “will be in a relatively strong position to comply with any additional capital rules, primarily through retained earnings.”