The big Canadian banks are facing a variety of headwinds that are keeping the outlook on their credit ratings at negative for the time being, said Fitch Ratings on Thursday.
In a new report, the rating agency affirmed its existing ratings on the large banks. Fitch revised the rating outlook for Desjardins Group and National Bank of Canada to stable from negative, but kept negative outlooks on the Big Five banks.
The decision to maintain negative outlooks on most of the big banks “reflects Fitch’s view that, while the banking system has absorbed the brunt of earnings impact from the coronavirus pandemic, unfavorable conditions persist.”
The sector faces several headwinds, including rising debt levels, elevated unemployment and low interest rates, “making it unlikely that banks will return to pre-pandemic profitability until fiscal 2022,” Fitch said.
Against this backdrop, Fitch said it also expects loan impairments to rise through 2021.
In the current environment, Fitch doesn’t see any potential for ratings upgrades and said negative rating pressure could come from a variety of sources.
Theses sources might include “higher than anticipated credit quality deterioration, a failure to bring profitability on track to pre-pandemic levels, declines in capitalization, including from acquisition activity, or evidence of weaknesses in governance or risk controls.”
A variety of external factors could also result in rating downgrades, including deteriorating economic conditions, delays in vaccine distribution and weaker growth in core markets where banks have significant operations, such as the U.S., Latin America, the Caribbean, or other markets, beyond Canada.
Changes to macro-prudential policies, or runaway housing prices, could also prompt downgrades, Fitch said.
The rating agency said it expects to resolve the ratings with negative outlooks by mid-year.