The Canadian banks have enjoyed good performance, but they face increasing earnings challenges, says Fitch Ratings in a new report.
The rating agency says that earnings growth is expected to continue to moderate at the banks. “Retail loan growth in Canada, a meaningful driver of revenue and earnings growth, is likely to decline further in 2012. Capital markets-related revenue is expected to be weak and/or volatile as a result of concerns related to the euro zone and overall market uncertainty,” it says, adding that margin compression due to prolonged low interest rates will also remain a hindrance to earnings growth.
The Canadian banks are expected to continue to enjoy affordable access to global capital markets, Fitch says, noting that this distinct to the Canadian banks, as many of their global peers are experiencing funding difficulties.
And, it says that their capital positions are expected to remain sound, relative to global peers. Fitch expects all the major Canadian banks to meet the new Basel III capital rules by the end of the year.
Risks to the outlook are headlined by high household debt levels. “Should delinquencies in the domestic retail loan book increase beyond expectations, the ratings could come under pressure,” it says.
“From the banks’ perspective, the main risk to the leveraged household is a sustained period of high unemployment. Relative to a year ago, Fitch now places a comparatively higher, albeit still low, probability on increases in this measure of such a magnitude that would materially weaken the consumer sector,” the report says.
Also, the prospect of a protracted U.S. and global slowdown represent a downside risk to the rating outlook, it says.
Fitch notes that Canadian banks survived the 2008-2009 global crisis relatively unscathed. However, this time could be different, it warns.