Canada’s big banks are facing growing headwinds, according to a new report from Fitch Ratings that nevertheless affirms their ratings.
Fitch affirmed its ratings on Canada’s seven largest deposit taking institutions today — the Big Six banks and the Caisse Centrale Desjardins — saying their strong credit profiles are supported by their “resilient operating performance over multiple cycles”; the fact that most of their mortgages are insured; the banks’ good funding profiles, and their attractive access to wholesale funding markets. The rating outlook is stable.
The ratings are: Bank of Montreal, ‘AA-/F1+’; Bank of Nova Scotia, ‘AA-/F1+’; CIBC, ‘AA-/F1+’; Caisse Centrale DesJardins, ‘AA-/F1+’; National Bank of Canada, ‘A+/F1′; Royal Bank of Canada, ‘AA/F1+’; and Toronto-Dominion Bank,‘AA-/F1+’.
However, the rating agency also said that it is “becoming more and more cautious about macroeconomic concerns beginning to impact the Canadian banking sector.”
These concerns include long-standing worries such as the high level of consumer indebtedness and overvaluation in the housing market — coupled with newer concerns, such as the impact of lower oil prices, which could cause higher credit losses, or have negative spillover effects to the overall economy.
Additionally, Fitch says that it expects to see higher loan loss provisioning at the banks, which will weigh on their overall earnings. And, it says that a drop in earnings, particularly in the retail businesses, could skew the earnings mix more toward capital markets and wealth management, thereby increasing the volatility of earnings.
Finally, Fitch says that it believes that the Canadian banks’ asset quality metrics “are near a trough and there is likely to be some reversion” in those metrics. “To the extent that a bank’s reversion in asset quality metrics is above peer levels, or impacts the company’s capital ratios could also impact ratings over time,” it says.