With the global economy facing a deep recession due to the Covid-19 outbreak, Fitch Ratings has revised its outlook on the Canadian banks from stable to negative.
The rating agency affirmed its ratings on the Big Six banks and Desjardins Group, but dropped its outlook for each of them, indicating an increased risk of downgrade over the next 12 to 24 months.
Fitch said the risk of a downgrade varies among the banks, based on their current ratings and their financial performance.
“The outlook revisions reflect what we expect will be a significant deterioration in the operating environment as well as uncertainty around the severity and duration of the economic dislocation,” it said.
Fitch’s baseline scenario expects that Canada will experience a “severe economic contraction” in the first half, with a recovery in the third quarter.
It has also slashed its GDP forecasts for much of the world, and now expects global GDP to decline by 1.9% in 2020.
Fitch noted that the economic disruption comes at a time of “historically elevated levels of household and corporate indebtedness” in Canada, along with battered oil prices.
As a result, it revised its outlooks on the banks’ operating environment, asset quality and earnings to negative.
That said, it noted that “the Canadian banks confront the coronavirus pandemic from a position of relative financial strength and remain some of Fitch’s highest rated banks.”
In assessing the banks’ ratings, “Fitch will consider each bank’s exposure to more affected sectors, as well as vulnerability to second-order effects on the economy from the pandemic. As part of this, Fitch will evaluate each bank’s ability to perform against Fitch’s benchmark rating levels for earnings, asset quality and capital metrics by 2021.”