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Amid concerns about elevated debt levels, Fitch Ratings downgraded its assessment of the operating environment for the Canadian banks and lowered its rating for Royal Bank of Canada (RBC).

The rating agency lowered its rating for the Canadian banks’ operating environment to “aa-” from “aa,” citing high levels of both private and public sector debt that’s negative for both long-term credit conditions and banking volumes.

Alongside the general operating conditions downgrade, Fitch lowered its rating on RBC to “AA-” from “AA,” noting that the move “largely reflects the constraint of the Canadian [operating environment] score, notwithstanding the bank’s resilient financial performance during the pandemic, as Canadian operations represented approximately two-thirds of its assets and income.”

At the same time, Fitch affirmed its ratings on the other big five banks, and revised its outlooks for RBC, CIBC and TD to stable from negative. Its outlooks for Bank of Nova Scotia and Bank of Montreal remain negative.

Fitch said Scotia’s negative outlook reflects a dimmer view of the Canadian market and its view of the risks in the Latin America region where Scotia operates.

For BMO, the negative outlook is largely due to BMO’s profitability, “which has not recovered to benchmark levels, according to Fitch’s metrics,” it said.

Meanwhile the move to stable outlooks for CIBC and TD “primarily reflects reduced downside risks to earnings” even with the lower operating environment, it noted.

In the current climate, it’s unlikely that banks’ ratings will be upgraded, Fitch said.

“However, negative ratings pressure could stem from higher than anticipated credit quality deterioration, rapid declines in capitalization following the lifting of regulatory restrictions on capital actions, earnings volatility or evidence of weaknesses in governance or risk controls,” it noted.