The credit quality of the big Canadian banks is likely peaking, and is expected to decline in the months ahead, suggests Fitch Ratings in a new report.

The rating agency reports that while the big banks reported improved credit-quality metrics in their most recent quarterly results, it believes that Canadian credit quality is likely reaching a cyclical peak, and in the coming quarters it expect some deterioration “in credit measures where loss performance has been especially strong, particularly in credit cards, home-equity lines of credit and residential mortgages.”

“Deterioration of credit trends could be driven not only by an erosion of Canadian house prices, but also by potential exogenous shocks hitting commodity exports and employment,” it says. Although, it notes that Canadian employment numbers have recently been strong recently, with 95,000 jobs created in Canada last month.

Fitch says that second-quarter earnings for the Big Six banks were generally flat-to-down compared with the previous quarter, but grew year over year; and that net interest margins were also flat-to-down sequentially “as interest rates remained low and competition for loans heated up”.

“Surprisingly, residential mortgage balances at some banks have continued to rise. However, this appears to be concentrated in uninsured loans given tightening standards for insured mortgages, as well as the use of uninsured mortgages in covered-bond programs,” it notes.

Looking ahead, Fitch says that growth in fee-based businesses such as wealth management ” will likely play a larger role in driving bank results as net interest margins remain under pressure.”

It says that capital levels for the Canadian banks have also continued to improve amid continued steady earnings, and the generally positive credit trends. “Measured on a Basel III Tier 1 common equity basis, capital ratios moved higher for all of the Big Six institutions in the second quarter. Capital ratios for all of the large banks remain comfortably above current Basel III Tier 1 common minimums,” it says.