Following a review of the seven largest banking institutions in Canada (the big six banks and Desjardins), Fitch Ratings Friday affirmed its ratings on the seven financial institutions.
The rating outlooks for all seven firms are stable.
The rating agency says that its decision to affirm the ratings “reflects good and stable earnings levels, continued good credit quality, availability of credit insurance with respect to a significant portion of their mortgage portfolios, strong funding and liquidity positions, and sound capital ratios which also compare favorably to similarly rated international peers.”
Fitch says that the industry’s strengths position the Canadian banks’ ratings to withstand a moderate downturn in the Canadian housing market, and a deterioration in consumer credit profiles. Indeed, it says that it sees the potential for the Canadian banks’ credit quality to deteriorate, as the housing market is nearing a cyclical peak.
“Canadian banks face slowing loan growth amid strong competition that, combined with the low interest rate environment, will continue to weigh on earnings through additional margin compression,” it notes. And, it says that the Canadian banks are also “vulnerable to credit deterioration in their domestic consumer loan portfolios given high levels of consumer indebtedness in Canada.”
However, it notes that these risks are mitigated by the prevalence of CMHC-insured mortgages, relatively low loan-to-value ratios in the banks’ uninsured mortgage portfolios, and continued strong Basel III capital ratios.
Fitch also reports that it has performed a severe consumer stress test on each Canadian bank’s balance sheet, which “indicates that the banks’ capital position could withstand a moderate to severe consumer stress, not including any management actions to bolster capital ratios such as cutting dividends, selling assets, or raising incremental capital.”
In addition to the domestic risks, Fitch notes that banks with a significant presence outside of Canada, including RBC, Scotia, BMO and TD, “could have their ratings impacted should there be weakness in any of these markets”, particularly if that weakness adversely impacts credit quality and earnings.