Steady economy and capital buffers bolster Canadian bank health
Most major Canadian banks maintained strong creditworthiness but TD Bank faces a negative outlook due to its US money laundering investigation, according to Fitch Ratings.
The agency has reaffirmed the Long-Term Issuer Default Ratings (IDR) of Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Toronto-Dominion Bank, and Royal Bank of Canada at AA-. The National Bank of Canada's Long-Term IDR was kept at A+.
While the ratings for BMO, BNS, CIBC, RBC, and NBC remain stable, TD’s outlook has been downgraded to negative. This change is attributed to ongoing regulatory investigations in the United States concerning TD's anti-money laundering practices.
Fitch’s affirmation of these ratings reflects its confidence in the fundamental strength of Canadian banks. The agency expects stable economic conditions to support bank credit fundamentals and financial performance.
Fitch's Global Economic Outlook forecasts Canada's GDP growth at 1% for 2024, increasing to 1.5% by 2025 and 2026. Unemployment is expected to improve slightly, dropping from 6.2% in 2024 to 6.0% by 2026.
Asset quality is expected to normalize, with gross impaired loans (GIL) ratios trending higher. For the second quarter of 2024, the average GIL ratio was 0.64%, up from 0.59% in the previous quarter and 0.43% a year ago. However, it is not expected to sustainably exceed 1%.
The high-rate environment may result in continued softness for consumer loans, especially credit cards and unsecured loans. However, residential mortgage loans are performing well due to low loan-to-values, stable employment levels, and a housing shortage.
Despite increased loan loss provisions, profitability remains stable as banks have improved efficiency through cost controls. Strong revenue performance in domestic banking, capital markets, and asset management has offset higher provisions and slowing loan performance.
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Fitch noted positive trajectories in liquidity and capital buffers. The average liquidity coverage ratio was 135% in the second quarter of 2024, up from 130% in the fourth quarter of 2022. Most banks ended the second quarter with common equity Tier 1 ratios above 13%, except for Royal Bank of Canada at 12.8%.
Currently, the Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Toronto-Dominion Bank, and Royal Bank of Canada have a Zacks Rank of 3 (Hold), while the Bank of Montreal has a Zacks Rank of 5 (Strong Sell).
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