Rocky road ahead for North American banks: Fitch

With the prospect of further interest rate hikes and slowing growth, banks in the U.S. and Canada are in for a bumpier ride in the months ahead, says Fitch Ratings.

In a new report, the rating agency said that banks on both sides of the border are likely to face mounting headwinds in the second half of 2023.

“Tightening cycles generally lead economic cycles,” Fitch said, noting that its economists are calling for a “mild recession” to materialize in the the U.S. in the second half of 2023.

Late last year, Fitch revised its rating outlook for North American banks to “deteriorating,” due to the evolving financial and economic environment. Since then, “negative rating actions are on the rise,” Fitch said, particularly given the heightened stress in the U.S. banking sector, which culminated in several high-profile bank failures, and tougher funding conditions for banks generally.

“Loan losses are rising while U.S. bank earnings and asset quality are beginning to show signs of normalization as the monetary policy and regulatory ‘regime change’ takes root,” it said.

Heading into the second half, the commercial real estate sector remains a concern, with more negative rating activity “a distinct possibility,” Fitch said.

“Canadian banks are also feeling the squeeze,” noted Mark Narron, senior director at Fitch, in a release. “Step-up costs are eating into net income, expense growth is outpacing revenues and impaired are loans trending higher.”

But those “very clear headwinds are manageable,” he added, “as evidenced by Fitch affirming ratings for large Canadian banks” and the revision earlier this week of Bank of Montreal’s rating outlook to stable.

“Elsewhere, variable rate mortgages are still performing well, with payment shock for fixed-rate borrowers not likely to manifest until 2025-2026,” Narron added.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.