Slowing global growth and ongoing trade tensions could pressure future Canadian bank earnings, says Fitch Ratings in a new report.
The rating agency said that the Big Six banks recorded solid earnings in their fiscal third quarters, but a variety of macro headwinds could put their profits under pressure in the months ahead.
Fitch noted that “slowing global growth, declining interest rates, and possible contagion from U.S.-China trade tensions could depress business volumes and stress future earnings.”
Fitch reported that, while the large Canadian banks had strong loan growth and efficiency improvements in the third quarter, this was somewhat offset by growing margin pressure, rising loan loss provisions and volatile capital markets performance.
With markets expecting possible further rate cuts in the U.S., and a potential return to looser monetary policy in Canada, the banks are forecasting flat or modest declines in net interest margins in the short term, Fitch noted.
“Signs of credit normalization are starting to appear,” the rating agency said.
Fitch also said that the banks have limited room to materially cut costs.
“Higher digital adoption rates and controlled expense growth has bolstered banks’ efficiency ratios,” it noted.
Notwithstanding these headwinds, the rating agency also noted that the Canadian banks have strong capital positions and diversified business models, “which should offset potential risks from slowing economic growth.”