The outperformance of the major Canadian banks relative to their global peers should continue for the remainder of the year, says Fitch Ratings

In a special report on Canada’s banks, the rating agency observes that their “comparatively stronger profitability and performance on a global basis has continued so far in 2010, helped by solid increases in residential housing and consumer lending coupled with reduced provision expenses. Additionally, Canadian banks’ performance came against a backdrop of rapid economic expansion.”

Fitch says that the performance of the Canadian banks in the first half of 2010 was driven by solid growth in personal loans and increased residential mortgage lending. Additionally, non-interest income benefited from “enhanced income in wealth management due to market-related increase in fee revenue and elevated transaction volumes”; and, improved market conditions also bolstered capital markets revenue.

The banks’ performance for was also boosted by a sharp drop in loan loss provisions, it says. “Future reductions in provisioning expenses will be largely driven by the extent to which the Canadian economy maintains a healthy growth rate although ongoing provisioning will be required to match loan growth,” Fitch adds.

It also sees the banks continuing their international expansion efforts. “Prospectively, it remains very likely that Canadian banks will seek additional transactions south of the border as a number of U.S. financial institutions remain under stress and/or look to shed some businesses,” it says.

With the Bank of Canada having started its tightening cycle, Fitch notes that this will have mixed effects for the banks. “Generally speaking, interest rate increases should help banks’ net interest margins that have been under pressure for some time now. At the same time, the household sector debt service ratio has trended upward over the past few periods. As interest rates rise, household interest payments will take up an increased portion of disposable income, which may reduce loan demand and/or negatively affect asset quality,” it says.

“Looking ahead, economic conditions in Canada and the global economy will largely determine any further rate hikes.”

IE