Fitch Ratings Inc. has affirmed its ratings on the seven largest Canadian banking institutions — the Big Six banks and the Caisse Centrale Desjardins — citing their resilient fundamentals.
“Despite challenges over the past year, Canadian banks have delivered solid results, with only nominal weakening of asset quality,” the credit-rating agency says in a report. “Further, the Canadian banks maintain appropriate capital and good funding profiles.”
This remains the case even after the federal government introduced “proactive and prudent” policy changes to cool the housing market given the continued strength in housing prices, Fitch says, adding that Canadian home prices are still overvalued by approximately 25%, overall, with major regional variations.
The most significant of these changes is the introduction of a lender risk sharing policy, Fitch says: “This will shift some modest default risk of insured mortgage lending from the government to the banks over time.”
The other measures include tighter requirements for mortgage insurance and tax changes. Fitch expects that, over time, these changes mean, “the amount of insured mortgages across the industry will decline.”
Outside of the housing market, Fitch also says that Canadian bank ratings “remain sensitive to prolonged low oil prices, unemployment, and elevated household debt levels.”
For now, these risks are contained, Fitch says, but economic weakness that leads to a sharp rise in unemployment “could accelerate credit deterioration.”
Although the banks’ direct exposure to oil and gas lending “has performed in line with expectations,” Fitch says that they could face losses if “oil prices experience another round of negative price volatility.”