Bank ratings can weather rising rates: Fitch

Despite shaky financial markets and deteriorating economic conditions, the outlook for the big Canadian banks remains strong, says Fitch Ratings.

In a new report, the rating agency affirmed its ratings on the Big Six banks and upgraded its outlook for Bank of Nova Scotia to stable from negative.

The revised rating outlook for Scotiabank reflects “stabilized conditions in the bank’s most important Latin American markets, structural de-risking and improved performance of its international banking segment,” Fitch said.

In affirming the ratings on the six domestic systemically important banks, Fitch noted that “supportive macro-prudential policies, disciplined underwriting, and strong asset quality, profitability and liquidity provide adequate headroom in current ratings,” even as rising interest rates may negatively affect credit quality and liquidity conditions.

Fitch said the banks’ current ratings can accommodate a return of impaired loans to more normal levels from “unusually strong levels” and a decline in profitability as loan-loss provisions rise.

In the first half, the banks’ operating profit as a share of risk-weighted assets averaged 4%, it reported, noting that this is nearly 100 basis points above the average for the previous five years.

Fitch’s outlook remains negative for Bank of Montreal due to the integration risks and potential capital impact stemming from its acquisition of Bank of the West, which is expected to close later this year.

“Evidence of successful execution of the transaction” could see BMO’s outlook returned to stable along with the rest of the banks, it noted.

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.