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Intensifying margin pressure, robust competition and rising capital demands will represent increasing challenges to the big Canadian banks in the second half of 2019, says Fitch Ratings.

In a new report, the rating agency indicated that the banks saw a rebound in their capital markets businesses and strong international growth, offsetting weakness in Canadian retail banking in the second quarter.

Credit quality metrics remain solid, but Fitch also said they showed signs of deterioration, with the average gross impaired loan ratio rising to 53 basis points (bps) in the second quarter from 48 bps.

Looking ahead, Fitch said it expects the banks to face pressure on margins due to a flattening yield curve, and ongoing competition in the mortgage market.

“The second half of the year could prove challenging for Canadian banks, but their institutional strengths more than offset most of the risks,” Mark Narron, director for Fitch Ratings, said in a statement.

“The big six banks’ diverse business lines by product and geography, solid asset quality and strong capitalization mitigate broader downside macroeconomic weaknesses,” he added.

At the same time, the recent decision of bank regulators to raise the capital buffer by 25 bps to 2.0% of risk-weighted assets (RWAs) could hamper future international expansion aspirations, Fitch said.

“The U.S. has been a very attractive market for the Canadian banks, and we could see organic and inorganic U.S. expansion taper off as banks now need to maintain higher capitalization levels,” Narron added.