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

Fitch Ratings has dropped its outlook on the Canadian banking sector from stable to negative, citing the growing fallout from the Covid-19 outbreak.

The revision stems from a growing concern about the pandemic’s impact on banks’ asset quality and profitability, the rating agency said.

Those negative effects may be “materially outside” of its previous expectations, it said.

In particular, the outlook revisions reflect both a “significant deterioration in the Canadian operating environment” and uncertainty about how long the negative economic effects may last, Fitch said.

Last week, Fitch cut its GDP forecast for Canada in 2020 to 0.5% from 1.6%.

The shifting outlook also follows the central banks slashing rates, a large drop in oil prices and “the material disruption in equity and debt capital markets,” Fitch said.

The rate cuts are expected to result in margin compression, and market disruptions are likely to result in “reduced investment banking and wealth management income,” Fitch said.

Additionally, this turmoil comes at a time when Canadian households and companies have elevated debt levels, “which could exacerbate credit quality deterioration over the near to medium term.”

For instance, Fitch said that higher unemployment could translate into higher consumer loan losses.

It also sees the risk of debt service stress in the corporate sector, particularly in vulnerable sectors such as oil and gas.

However, the rating agency also noted that government efforts to limit the damage will serve as “material mitigants to disruption in wholesale funding markets.”

Fitch said that it will soon review the banks’ ratings, and that it expects the rating outlooks for a number of them to be revised from stable to negative.