Banks facing mounting pressures, Fitch says

The negative effects of the Covid-19 outbreak on the Canadian banks are building, says Fitch Ratings.

In a new report, the rating agency said that in the banks’ last quarterly results, they reported negligible direct exposure exposure to geographies or sectors affected by the outbreak.

Since then, however, the global effects of the outbreak have intensified, strengthening the headwinds to banks’ loan growth, net interest income, credit quality and capital markets operations, Fitch said.

“Canadian bank loan growth was already on a downward trajectory, and with volatile swings in financial and commodity markets, we expect potentially significant adjustments in economic and performance outlooks, depending on the severity and duration of the outbreak,” Mark Narron, director at Fitch Ratings, said in a statement.

The significant rate cuts in Canada and the U.S. in response to the outbreak will pressure banks’ net interest margins (NIMs), Fitch said.

Additionally, the sharp decline in oil prices “raises concerns on credit quality in commercial oil and gas portfolios as well as indirect retail exposures to energy-reliant local economies.”

“As of [Q1], large banks’ asset quality indicators remained strong,” Fitch said. “However, impairments in the oil and gas sector have trended upwards at most large banks.”

The expected slowdown in Canadian economic activity will also “exacerbate a slowing trend in loan growth,” Fitch said.

In particular, commercial loan growth was already slowing, which Fitch expects “could become more pronounced due to coronavirus-linked effects.”

“The severity and length of the economic fallout from the global coronavirus will be the key determinants in how Canadian banks perform over the coming year,” Narron said.

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.