Risks lurking for Canadian banks despite positive outlook: DBRS

The outlook for the Big Six Canadian banks remains positive for 2019, but a growing set of risks is lurking, says DBRS Ltd. in a new report.

The rating agency says it expects solid earnings growth from the big banks in the year ahead, powered by “generally favourable” underlying economic conditions and their expanding international businesses, which DBRS expects will provide a growing share of revenue.

In fiscal 2018, the Big Six banks saw earnings rise by 7.4%, as revenue rose across most business lines, and ongoing efforts to boost efficiency continued to produce results.

These same forces are largely in place for the year ahead, but DBRS also sees a variety of downside risks. Those risk range from domestic issues such as household debt levels and overheated housing markets, to threats facing the global economy, including oil price volatility, trade tensions and other geopolitical risks.

“While economic conditions currently remain favourable in Canada and globally, DBRS notes various systemic vulnerabilities that could moderate earnings growth for the large Canadian banks in [fiscal] 2019,” the report states. “DBRS remains concerned over highly leveraged Canadian consumers, elevated housing prices in the GVA and GTA and the rapid growth in commercial lending. Moreover, numerous risks to the positive global economic outlook persist.”

The report indicates that the contribution from the banks’ market-sensitive businesses, such as wealth management, may come under pressure in the year ahead. “Continued market volatility and declining equity prices would have an adverse impact on underwriting activity and average client fee-based assets, which would result in lower revenue growth for these businesses.”

Notwithstanding these threats, the rating agency says, the impacts are expected to be fairly modest, given the banks’ well-diversified business models. It also notes that the asset quality remains strong, and that the big banks are well positioned to absorb an increase in credit losses, should such losses materialize.

In terms of the banks’ credit ratings, DBRS continues to have a “positive” outlook on the long-term ratings of Royal Bank of Canada and Toronto-Dominion Bank, with “stable” outlooks for the rest of the Big Six.

Staff

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