Fitch Ratings expects margin pressure to intensify and provisioning expenses to rise, but the outlook for the Canadian banks remains stable for 2020.
In a new report, the New York-based rating agency predicted 2020 will also see weaker commercial loan growth and lower capital markets activity amid a softer global environment and trade-related uncertainty.
Yet, Fitch said the banks are “well positioned to manage these challenges” due to increasing digitization and efforts to improve efficiency, foreign expansion, and their capacity to generate fees.
“Fitch expects Canadian banks to advance digital transformation to offset the negative earnings impact from lower borrowing rates and normalizing credit quality,” said Mark Narron, director of Fitch.
“We’ll likely see fintechs increasingly insert themselves into the financial system as product providers and partners, but BigTech, such as Google and Amazon, may present more long-term competitive threats to larger banks than fintech startups,” added Narron.
Overall, the tougher operating environment is expected to produce weaker financial performance and asset quality metrics at the Canadian banks that are more in line with the sector’s historical averages.
The risk of a downturn emanating from a correction in the overheated housing market hasn’t disappeared, but it continues to ease, Fitch said, thanks to policy action designed to curb that risk.
“While the operating environment is becoming more challenging, tail risks from elevated household and corporate leverage are moderating but remain a focus for Fitch,” Narron said.