Moody’s Investors Service Inc. continues to have a negative outlook on the Canadian banks for the year ahead, citing expectations of reduced government support for troubled banks.
The credit-rating agency says in a new report that its outlook for the banks remains negative for 2017, driven by the likely reduction of support for systemically important domestic banks.
“We expect that a bank recovery and resolution framework will be formalized during 2017, which will include a bail-in of creditors of systemically important banks so as to reduce the cost of future bank failures to the public,” says David Beattie, senior vice president at Moody’s, in a statement.
Apart from the evolving policy environment, Moody’s says that Canada’s elevated housing prices and high levels of household debt remain vulnerabilities for the banks.
“While Moody’s expects that Canadian lenders could absorb a mortgage loan shock, bank earnings could be vulnerable if unemployment rises or interest rates rise,” the report notes.
In addition, earnings growth will be an ongoing challenge for the banks, which will likely drive them to seek growth in business that are outside their core domestic franchises, the credit-rating agency says.
In a separate report, Moody’s says that efforts to improve the stability of the global financial sector is boosting banks’ credit position generally, but that profitability and asset risk “will remain an issue for many institutions in the coming year.”
“Banks across all regions are at or approaching compliance with Basel III capital requirements and, even with subdued economic growth, will continue to build on or maintain capital metrics as global requirements are finalized and phased in,” says Gregory Bauer, managing director, global banking, at Moody’s, in a statement.
European banks have broadly improved or stabilized their credit profiles, but risks have begun to materialize in some emerging markets, the Moody’s report says.
Specifically, increased policy uncertainty, growing protectionism and the prospect of further political fragmentation in Europe, the report adds, “could weigh on the growth outlook as well as lead to some scaling back of some jurisdictions’ financial regulation agendas.”
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