The “Big Six” Canadian banks produced better than expected earnings in the third quarter, but they’ll be challenged to continue that outperformance, Fitch Ratings says.

In a new report, the rating agency says that cumulative net income for the Big Six amounted to $8.2 billion in the third quarter, which is up 43% year-over-year. For the year-to-date, the banks have reported collective earnings of $22.3 billion, up almost 18% from the same period last year, it adds.

Fitch says that the banks’ reported earnings were well above expectations, driven by volume growth in retail and commercial banking and modest provisioning expenses. Asset quality remained sound, and they enjoyed a solid rebound in capital markets related activities, it says. International operations also boosted profits at four of the big banks, it notes.

Wealth management was the weak spot, with earnings crimped by low interest rates and low transaction volumes, it says.

However, wealth management has been a targeted area of expansion for the banks over the past several quarters, it notes, and it says that recently completed acquisitions contributed to the performance of the wealth management businesses.

Looking ahead, Fitch says that it expects earnings growth to moderate as mortgage growth decelerates. “The strong earnings growth of this quarter is not likely to be replicated as results benefited from mortgage growth associated with the seasonally strong third-quarter which includes spring and summer months,” it says, adding that this growth should be curbed by record household debt levels and the implementation of rules intended to cool the housing market.

“Margin compression and markets volatility are expected to continue to put pressure on earnings growth,” it says. Indeed, Fitch notes that spread compression is likely to continue for an extended period, highlighted by the latest Bank of Canada decision to keep its key interest rate unchanged at 1%. “Managing lending spreads will remain a priority and a challenge for the Big Six in future quarters,” it says.

“Household indebtedness and the housing market continue to be the main downside risks to the ratings of the Big Six,” it adds. “With interest rates likely on hold for still some time, the near-term threat to the Canadian banks would likely be related to a labour market shock that significantly reduces consumers’ ability to pay.”

In this environment, the Big Six are all focused on managing costs, Fitch adds. “Positive operating leverage has emerged as a key management target to support future earnings trends.”

And, it says the banks are also looking at acquisitions as an additional source of profit growth, particularly outside of Canada. “Asset disposals by European banks may present opportunities for targeted and/or bolt-on acquisitions for Canadian banks,” it says, noting that CIBC has already announced two small acquisitions since the end of the quarter, and Scotiabank announced its deal for ING Bank of Canada.