TD, CIBC, BMO and other skyscrapers in Toronto in spring

While the credit outlook for most global banking systems is negative, Canada is an outlier thanks to its strong underlying fundamentals, says Moody’s Investors Service.

In a new report, the rating agency said that its outlook for Canadian banks in 2021 is stable, underpinned by banks’ robust credit strength.

Moody’s said that loan loss provisions rose to “unprecedented levels” in the second and third quarters, but banks’ “capitalization and liquidity remain sound and provide a solid buffer against likely stressed losses.”

Indeed, Moody’s noted that common equity tier 1 levels have improved this year, even as the banks’ capital buffers were reduced.

“The severity and duration of the coronavirus-driven economic downturn is uncertain, and impaired loan provisions are likely to trend higher in the coming quarters as deferrals and client relief programs roll off,” Moody’s senior vice president David Beattie said in a statement.

Yet, to date, those losses have remained limited thanks to initial government support measures.

“Many consumers have used the [government transfer] programs to remain current on household debt while also making payments on unsecured credit liabilities,” Moody’s said.

“Overall, consumer insolvencies have nearly halved from first quarter levels, but there was an uptick in September as support measures shrank.”

Even if higher loan losses do materialize, Beattie said, the “proven earnings power of banks has enabled them to absorb an unprecedented level of loan loss provisions.”

Separately, Fitch Ratings said the latest results from Canadian banks indicate that they “have largely withstood the financial fallout of the pandemic.”

While loan defaults remain subdued, Fitch said that it expects borrowers in vulnerable sectors, “such as oil & gas, restaurants and retail, could contribute to a steady rise in impairments and charge-offs against existing reserves through 2021.”

Fitch also noted that uncertainty “around the scale and speed of future loan deterioration remains the largest downside risk for Canadian banks.”

Looking ahead, Fitch said that it expects that “a more robust consumer-led economic recovery will reduce excess liquidity, generating higher business volumes and mitigating the lower rate environment.”