The Canadian banks delivered strong results in the first half of 2012, but their earnings growth is expected to prove tougher to find in the second half, says a new report from Fitch Ratings.

The rating agency says that the big six banks reported better than expected earnings for the first six months of fiscal 2012. It notes that loan quality remained favourable, which, along with solid funding positions and sound capitalization, supports its stable rating outlook for the Canadian banks.

However, looking ahead, Fitch says that the banks’ future earnings performance will come against a less favourable backdrop. It expects earnings growth will continue to moderate. “Retail loan growth, a meaningful driver of revenue and earnings growth, is likely to decline as consumers start to deleverage and the housing market shifts to a lower gear,” it says, adding that commercial lending is not likely to offset the slower retail lending. Moreover, tighter margins due to prolonged low interest rates will remain a hindrance to growth, it suggests.

Additionally, Fitch says that, given their current level, loan loss provisions are more likely to trend upward than down. And, capital markets-related revenue is expected to be weak and/or volatile as a result of concerns related to the euro zone and overall market uncertainty.

“The major Canadian banks have developed strategies to support earnings growth in coming periods,” the report says. “Expense management and increased contributions from international banking and wealth management operations are going to be relied upon to maintain earnings growth on an upward trajectory.”

Also, they are aiming to deliver positive operating leverage. Yet, Fitch says that while several of them could do this in their domestic franchise, it will be a challenge for their entire operations. “This objective should not detract from the spending that is necessary to support future growth,” it adds. And, these strategies are prone to a variety of risks, including executive risk, market risk and interest rate risk.

The biggest risk to the overall outlook, it stresses, is household debt, driven by mortgage lending. Knock-on effects from the crisis in Europe could also weigh on their ratings, it suggests.

The report says that National Bank and CIBC are the most exposed to a slowdown in the Canadian consumer sector as they both maintain a domestic focus.