CHICAGO--(BUSINESS WIRE)--High and unsustainable levels of consumer indebtedness is the key macroeconomic factor driving the outlook for Canadian banks in 2015, according to Fitch Ratings.
Elevated consumer debt levels, combined with signs Fitch believes indicate regional overvaluation in the Canadian housing market, precipitates a more cautious view of consumer credit and thus a negative sector outlook for Canadian banks. That said, government guarantees on the majority of Canadian mortgages, which insulates bank balance sheets, supports a Stable Rating Outlook in 2015.
Earnings for Canadian banks remain solid, driven largely by low provision expense. Fitch expects some increase in provision over time, leading to a decrease in earnings, should credit quality deteriorate due to macroeconomic factors.
From a credit standpoint, the potential rating downsides of some Canadian banks are increasing due to what Fitch believes is a likely peak in earnings performance and a decline of credit metrics. Credit metrics may deteriorate due to a reversion in consumer credit performance, failing oil prices affecting Canadian Oil spreads, and/or other macroeconomic factors.
With a likely slowing earnings growth from consumer businesses, Canadian banks are focusing more on driving non-interest income growth. This includes a more significant emphasis on capital markets and wealth management revenue. These sources of revenue - particularly capital markets - tend to be more volatile in nature, and further growth of which could, over time, affect ratings.
Canadian banks are among the highest rated entities in Fitch's financial institutions portfolio, which six of the eight Canadian institutions rated in the 'AA' category.
The full '2015 Outlook: Canadian Banks' is available at 'www.fitchratings.com.'
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: 2015 Outlook: Canadian Banks (Stable RatingOutlook, Negative Sector OutlookRemains for 2015)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=810389
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