High levels of household debt and an overvalued housing market are weighing on the outlook for the Canadian banks, says Fitch Ratings.
The rating agency says that they key macro factor driving its outlook for the Canadian banks in 2015 is “high and unsustainable levels of consumer indebtedness.” It notes that high consumer debt levels, along with regional overvaluation in the Canadian housing market, “precipitates a more cautious view of consumer credit and thus a negative sector outlook for Canadian banks.”
That said, Fitch says that its outlook for the banks in the year ahead is stable, due to the fact that the federal government guarantees the majority of Canadian mortgages, which insulates bank balance sheets from housing market turmoil. Additionally, bank earnings remain solid, driven largely by low provision expenses, it says.
Fitch expects some increase in provisions, and a decrease in earnings, if credit quality deteriorates due to macroeconomic factors. “From a credit standpoint, the potential rating downsides of some Canadian banks are increasing,” Fitch says, due to what it believes is a likely peak in earnings performance, and a decline of credit metrics.
Additionally, it notes that amid slowing earnings growth from consumer businesses, Canadian banks are focusing more on businesses such as capital markets and wealth management. “These sources of revenue – particularly capital markets – tend to be more volatile in nature, and further growth of which could, over time, affect ratings,” it says.