Growing risks on the horizon for Canada’s banks

Growing risks on the horizon for Canada’s banks

DBRS remains concerned over increasingly elevated Canadian home prices and high household debt levels

James Langton Investment Executive | February 12, 2018

The six large Canadian banks are expected to see continued growth in 2018, powered by a robust global recovery and solid domestic economic growth, despite an array of risks, says Toronto-based DBRS Ltd. in a new report.

The banks “are well positioned to take advantage of a growing Canadian economy and moderately increasing interest rates,” the report says.

The report forecasts Canadian gross domestic product growth of 2.3% in 2018, and says the banks will also benefit from a rebound in global growth, given their operations in the U.S. and around the world.

“Earnings for the large Canadian banks are likely to benefit from continued loan growth and higher asset values, as well as from the banks’ expanding domestic and international franchises. In addition, modest net interest margin expansion should contribute to the strong results expected in 2018,” the report says.

Against this rosy economic backdrop, however, the report outlines growing risks to the banks’ domestic operating environment, stemming from the overheated housing market and high household debt levels.

In particular, it warns that housing prices in the greater Toronto and greater Vancouver areas “appear vulnerable to a correction.” As well, “High household indebtedness could amplify the impact of any adverse employment or interest rate shocks on the real economy.”

Additionally, the global rate environment represents a risk for the banks (if interest rates rise more rapidly than expected), the report says, and it warns that a negative outcome of the NAFTA renegotiations could also provide a negative economic shock to Canada.

“Global economic growth could also be tempered by rapidly rising interest rates, disruptions in international trade or other geopolitical developments,” the report cautions.

Nonetheless, the report forecasts DRBS’s underlying credit assessments of the large Canadian banks to remain stable, or improve, in 2018. It also notes although DBRS has negative trends on the long-term ratings of four of the six big Canadian banks — Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, and Bank of Nova Scotia — this stems from the introduction of a new bail-in regime in Canada, rather than weakness in the banks’ fundamentals.

https://www.investmentexecutive.com/news/research-and-markets/growing-risks-on-the-horizon-for-canadas-banks/