NEW YORK--(BUSINESS WIRE)--Link to Fitch Ratings' Report: 2017 Outlook: Canadian Banks (Resilient
Performance Despite Uncertain Times)
https://www.fitchratings.com/site/re/890713
Canadian banks' strong fundamentals, including solid risk management, sound capital and consistent performance, support credit profiles in 2017, even as challenges from the economy, a potential slowdown in the mortgage market and earnings pressures from low rates persist, according to Fitch Ratings.
Risks should be manageable under our core expectations for the housing market and modest GDP growth. However, Fitch expects earnings growth, mortgage lending and asset quality all to come under pressure next year. Despite these pressures, Fitch has revised its sector outlook for Canadian banks to stable from negative, reflecting our views on overall industry performance trends. The sector rating outlook remains at stable.
Fitch believes that Canadian banks' credit performance is likely at a cyclical peak, with a combination of macroeconomic and housing market trends pointing to some credit reversion in 2017.
High household indebtedness and rapid home price inflation in recent years mean that Canadian banks continue to be sensitive to a severe housing market correction. Fitch's latest sustainable home price model indicates that home prices are overvalued by around 25%, although with significant regional variation.
Regulatory changes designed to cool the housing market, both those introduced in 2016 and proposed for the future, will also be a factor in slowing mortgage lending. The introduction of mortgage insurance requirements for low ratio mortgages and mortgage rate stress test for insured mortgages are part of a broader suite of new rules, which indicate a proactive and prudent approach to addressing the housing market given the continued growth in home prices.
Over the long term, the proposal of a lender risk sharing policy is likely to be the most impactful regulatory change for the banking sector and would mark a significant structural shift to balance the credit risk from the sovereign and on to the banks. Currently, the Canadian Mortgage and Housing Corporation, a crown corporation, provides a 100% government guarantee for eligible mortgages.
Over time, Fitch would expect the mix of insured mortgages on the balance sheet to decline from current levels. Nonetheless, Fitch believes that lender risk sharing would contribute to an orderly slowdown in the housing market and, ultimately, would be positive for banking stability over the long run. This, in turn, would be supportive of current Canadian bank ratings.
Altogether, Fitch expects only modest domestic loan growth, higher credit costs and continued earnings pressures for Canadian banks in 2017. Asset quality would also be pressured from increases in impaired loans and impairments and from secondary effects should commodity price volatility continue, although remain within manageable levels.
Despite the general trends and challenging systemic environment, solid risk management and a good capital position should act as key protective buffers for banks' credit profiles. Under Fitch's core scenario, the expected macroeconomic and housing trends should not be of sufficient scale or rate of change to result in meaningful bank asset portfolio deterioration.
Canadian banks' resilient business models backed by solid franchises will also continue to benefit their credit profiles. The large banks plus the Caisse Central Desjardins account for 93% of system assets, giving these banks strong market positions in major markets and key business segments. This allows the large banks to ensure an appropriate risk-return profile for their business.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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