The profits of the big Canadian banks may take a hit from a change in international accounting rules, says Fitch Ratings in a new report.
The Big Six banks “may see volatile swings” in their loss provisioning, which will impact earnings in future quarters due to implementation of the new IFRS 9 accounting standard, the report says.
IFRS 9 governs accounting for the impairment of financial assets.
“Canadian banks may be forced to take more provisions now that IFRS 9 has been fully introduced as provisions are likely to decline during cyclical upturns and increase rapidly during downturns,” says Doriana Gamboa, senior director at Fitch, in a statement.
In the first quarter of 2018, the Big Six banks reported solid revenue and earnings growth, the report notes, adding that the impact of IFRS 9 was “manageable” in the quarter. “Strong earnings generation offset the one-time impact to equity from IFRS 9,” the reports says.
Overall, the operating environment supports Canadian bank performance. “Asset quality remains sound with low loan impairment charges and stable delinquency trends across consumer and corporate portfolios,” the report says. “Consumer credit trends remain in line with expectations with no signs of stress from the modest interest rate increases thus far. Given energy price stabilization, wholesale credit has improved.”