Canada's six largest banks have remained strong in spite of a considerable slowdown in mortgage originations and continuing concerns over rising consumer debt, according to a new study by Fitch Ratings.
‘Although we expect a further cooling of housing market trends to put pressure on mortgage performance for these institutions, offsetting capital markets revenue growth is providing support for the banks to boost capital levels while returning cash to shareholders,’ says Fitch Ratings.
Fitch Ratings notes that the six banks – Royal Bank of Canada, TD Bank, Scotia Bank, Bank of Montreal, CIBC and National Bank of Canada – reported earnings growth in the first quarter of fiscal year 2013, even though their mortgage origination volume was down during the quarter.
"To a large extent, growth in commercial lending, global banking and wealth management is offsetting mortgage trends and boosting overall bank performance," says Fitch Ratings. "However, the more volatile trends in these businesses, in addition to their sensitivity to global economic conditions, could limit earnings power for the Big Six institutions in coming quarters."
However, Fitch Ratings warns that Canada's banks face potential problems as the year progresses.
‘While conditions in Canada's labor market have improved somewhat and tepid economic growth continues, we believe the potential exists for a deterioration in mortgage asset quality trends,’ the rating agency says. ‘Credit risks could increase significantly if a sharp downturn in employment, commodities or economic growth causes borrowers' credit quality to decline and, therefore, adversely impacts housing prices. While a significant pullback in nationwide housing prices similar to the one seen in the U.S. has not occurred, some signs of a slowdown have appeared in major markets, such as Vancouver and Toronto, where rapid development in recent years could make these markets more sensitive to a decline in residential housing prices.’