Low angle view of Skyscrapers in downtown Toronto during the day
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Despite growing pressure on their finances, the credit ratings for the big Canadian banks should remain stable in the year ahead, says Fitch Ratings.

In a new report, the rating agency said that, while slower growth and deteriorating asset quality will weaken the banks’ fundamentals, they aren’t expected to exceed their current rating room.

“Although the sector outlook for Canadian banks is deteriorating, with financial metrics expected to worsen compared to 2022, banks start the year with historically strong asset quality, profitability, capitalization and liquidity, and should withstand slowing economic growth,” it said.

Fitch’s base case is for GDP growth to slow to just 0.6% this year from 3.5% in 2022, and for unemployment to rise to 6.1% from 5.1% last year.

The outlook also assumes that the Bank of Canada is near the end of its rate tightening cycle — even so, “higher mortgage payments and inflationary pressures, coupled with rising unemployment, pose risks for credit quality,” it said.

While household savings remain elevated, Fitch said that credit losses are returning to “more normal” levels, and it expects “a doubling of loan impairment charges to levels resembling long-term historical averages.”

Rising loan loss provisions will challenge profits, as will “persistently weak capital markets activity and softer asset management related fees,” Fitch said.

“Higher net interest income may be the only bright spot for Canadian bank revenues in 2023. However, net interest income growth will slow compared to 2022, as slower loan growth and increased competition for funding offsets higher rates,” it noted.

Indeed, deposit growth is expected to slow, and shift to higher yielding products.

Against that backdrop, “liquidity management is a priority,” it said, adding “capital deployment for recent acquisitions amid increased regulatory capital requirements will create additional headwinds for banks.”

Next month, regulatory capital requirements will increase, but Fitch said that banks “have the flexibility to raise capital,” if needed.