The Canadian banking industry is appropriately managing its risks, credit rating agency DBRS said Wednesday.

“Despite the challenging credit and capital markets environment witnessed over the last 18 months, the Canadian banking industry is suitably managing risks,” DBRS said in a research note.

“The banks have strong earnings before loan losses and taxes and capital levels sufficient to absorb potential losses that would result from risk-taking,” it said.

“Barring material acquisitions, DBRS does not expect substantial changes to the risk profile of the Canadian banking industry.”

In terms of credit risk, DBRS notes that its outlook remains strong, notwithstanding the ongoing rise in loan loss provisions. The outlook is supported by the diversification of the loan portfolio, with a high proportion of consumer lending versus corporate and government loans – although, it notes that some banks do have a higher exposure to more volatile industries such as commercial real estate and sub-prime residential mortgages in the US.

“Since 2000, the large Canadian banks have also been proactively managing their loan portfolios, including using loan sales and credit derivatives to manage the overall level of exposure. The track record of the Canadian banking industry has been very strong in managing retail credit,” it says.

Market risk has become a more important component of a bank’s risk profile, due to the increased complexity in trading businesses, DBRS observes. Yet it notes that since the first quarter of 2008, the absolute level of market-risk risk weighted assets in the Canadian bank group has been sequentially declining. “Over the same period, trading revenue has improved, from trading losses to positive trading revenue,” it says, adding that, it anticipates that, “the directional trend for market-risk risk weighted assets will continue, but it will be challenging to replicate recent trading revenue.”

Finally, it notes that at the end of the third quarter, on average, operational-risk RWA accounted for 12.4% of total risk weighted assets for the largest six banks. DBRS says it does not expect material changes in the operational risk RWA relative to total RWA.

IE