Canadian banks are likely to face earnings growth challenges in the year ahead, nevertheless their credit outlook is stable for 2012, says Fitch Ratings.
The rating agency says that the stable outlook reflects the industry’s consistent earnings performance, sound asset quality, good liquidity and solid capitalization levels. However, it expects the banks will also face challenges as future earnings performance is expected to come against a less favourable backdrop, with earning growth likely to slow.
Fitch says that Canadian retail loan growth, which is a meaningful driver of overall revenue and earnings growth for the banks, should decline further in 2012. It also notes that capital markets-related revenue is expected to be weak and/or remain volatile as a result of Eurozone and overall market uncertainty. Ultimately, it says the decline in earnings growth experienced in 2011 will likely continue in 2012.
Among the other challenges facing the banks, Fitch notes in its report, are high levels of household indebtedness and the frothy Canadian housing market; the risk of eurozone contagion; and the execution risk in their expansion strategies. It notes that the Canadian banks have remained acquisitive over the past couple of years, but that these deals also carry a certain amount of execution risk.
“Expansion into the U.S. by TD and [Bank of Montreal] warrants close monitoring. {Royal Bank’s] unsuccessful venture into the U.S., which culminated with the announced sale of its U.S. retail operations, would indicate that retail and commercial lending could be a riskier business in the U.S than in Canada,” it notes.
Still, the credit ratings for Canadian banks remain among the highest of Fitch’s ratings. And, given the current high rating level of Canadian banks, Fitch does not believe there is considerable upside rating potential for them in the foreseeable future.