Canadian banks may face some headwinds from the assortment of macro issues facing the Canadian economy, says Fitch Ratings in a new report.
Fitch points to unsustainable levels of consumer debt, overvaluation in the housing market, and the recent drop in oil prices, as factors that could have spillover effects for the Canadian banks. These issues are partly offset by the banks’ resilient operating performance and government-sponsored mortgage insurance, Fitch says, but it still expects earnings to at the Canadian banks to slow as they shift their focus away from consumer businesses.
“The downside risk to the Canadian consumer is growing as personal debt has increased to keep pace with home price growth,” says Justin Fuller, senior director at the rating agency. “While we do not expect consumers or the housing market in Canada to face a hard landing at this juncture, bank earnings may still feel the pinch.”
With the robust housing market of the past few years, mortgage-related consumer assets have come to represent more than half of Canadian bank balance sheets, Fitch says, “making a future shift in earnings mix toward capital markets and wealth management likely in order to offset a potentially slowing consumer.”
Finally, Fitch says that while the banks’ direct exposure to the oil and gas industry is likely manageable, it could “become more worrisome if oil prices remain at current levels for an extended period and there is some spillover into the overall economy which impacts Canadian employment levels.”
That said, Fitch notes that it recently reviewed the seven large Canadian financial institutions in its portfolio, and affirmed all ratings; rating outlooks remain stable too. Notwithstanding the prospect of slower earnings from their consumer businesses, Fitch says that the banks’ capital ratios remain adequate, and balance sheet liquidity and funding is strong.