Fitch Ratings has affirmed its Issuer Default Ratings for the big five Canadian banks, citing their comparatively solid financial foundations, the rating agency said Tuesday.

However, Fitch doesn’t expect them to become big buyers of their beaten up U.S. rivals.

The rating agency affirmed its ratings on each of Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada and the Toronto-Dominion Bank, noting that they “remain supported by sound overall financial fundamentals, comparatively stronger performance and diverse franchises.”

“Financial results of the Canadian banks remain favorable in many international comparisons with a relatively stronger performance outlook,” it said, adding that the big five “have been more resilient than peers thanks to a comparatively more healthy housing and mortgage market in Canada, lower exposure to problematic structured securities, solid levels of core earnings, and conservative overall risk management practices.”

Along with having its ratings affirmed, CIBC has been removed from Rating Watch Negative, although the ratings have been assigned a Negative Rating Outlook. Fitch says that the removal from rating watch recognizes the progress that CIBC has made in reducing its large exposure to U.S. sub-prime collateralized debt obligations and certain associated hedge counterparties, and it has strengthened its risk management. However, it adds that the negative outlook reflects its expectation for comparatively greater challenges for CIBC, especially relative to its Canadian peers.

The outlooks remain stable for the other four banks, “reflect[ing] their ample capacities to manage through a more difficult operating environment both domestically and internationally.”

“Tougher economic conditions will likely result in a further rise in asset quality problems. Nevertheless, the asset quality situation is anticipated to remain manageable within the context of current ratings. Additionally, non-performing assets will likely be maintained at better-than-peer averages,” it says.

Fitch notes that the Canadian banks will likely continue to look for U.S. expansion opportunities, however it doesn’t see them as aggressive buyers. “Fitch believes the Canadian banks will take a conservative approach toward acquisition opportunities in the U.S. market. Acquisitions will likely be focused on smaller deals, which are either in-market or in contiguous markets to existing U.S. operations. Acquisitions could center on either healthy banks or, in the case of troubled banks, government assisted deals to mitigate financial risk,” it says. “In Fitch’s view, unassisted transactions at this stage of the cycle are considered less likely as the banks will proceed with an abundance of caution. Once the cycle turns, the Canadian banks are expected to be more formidable acquirers.”

IE