Against the backdrop of a slowing economy and still-high household debt levels but falling interest rates, the big Canadian banks are expected to deliver modest earnings growth over the next couple of years, says Fitch Ratings.
In a new report that reviews the big banks (and Desjardins Group), the rating agency said still-tight monetary policy, along with housing affordability issues, continue to weigh on loan growth and net interest income for the sector.
While interest rates are on the way down, Fitch said that, given the lag in monetary policy, “any boost to economic activity is some ways off.”
“Household spending will likely remain feeble, at least through 2025, despite interest rate cuts,” it said. “Canadian households’ debt servicing burden exceeds 15% of gross disposable income and is likely to rise further.”
It currently forecasts that the Bank of Canada will cut rates to 2.5% by the end of 2026.
Longer term, Fitch said the big banks’ domestic operations will benefit from strong immigration, which will “support retail banking growth, especially in relation to residential mortgages and unsecured lending.”
The banks’ wealth management businesses “will likely benefit from Canada’s aging population and growing demands for wealth and estate planning products,” it said. And lower interest rates will bolster capital markets activity.
Overall, it forecasts “moderate” earnings growth for the banks in 2024 and 2025.
“Cost containment will likely remain an issue for the banks in 2024, although announced cost-cutting initiatives will help. Rising and elevated provisions will also present a challenge for many banks as they cushion reserves amid persistent economic uncertainty,” it said.
Within the group, it expects Royal Bank will continue to outperform the other big banks, “driven by its leading market positions and distribution.”
The banks’ asset quality remains strong, and, while the ratio of non-performing loans has risen in recent quarters, Fitch said it doesn’t expect “significant asset quality deterioration outside benchmark levels for any of the banks in 2024 or 2025.”
Commercial lending to more volatile and stressed sectors, such as oil and gas and U.S. office commercial real estate, “remains very manageable at less than 1%–2% (on average) of gross loans for each asset class,” it said.
The banks’ capital ratios are strong too, it said, noting, “their conservative risk profiles and diversified business models that have led to relatively stable capital.”
Fitch is projecting that the banks’ capital positions will increase a bit in 2024 and 2025, “driven in part by internal capital generation, manageable credit losses and moderate [risk-weighted asset] growth.”
“Also supporting capital and loss absorption are the banks’ low loan impairments and solid reserves,” it said.