OREANDA-NEWS. February 24, 2016. Canadian Banks fared relatively well through the 2008-2009 financial crisis and have enjoyed a prolonged period of stability; however, they are likely at an inflection point due to macroeconomic challenges, says Fitch Ratings. Canada's commodity-reliant economy will be facing challenges that pose new risks to Canada's major banks if oil prices remain 'lower for longer' and/or this creates a macroeconomic shock to the economy.

'So far Canadian Banks have been resilient and the oil slump has appeared manageable but as falling commodity prices permeate the broader economy, banks will begin to feel pressures beyond direct energy loan exposure,' said Doriana Gamboa, Senior Director, Fitch Ratings.

Oil production and allied sectors account for 10% of GDP and the decline in prices has a significant impact on the broader economy and unemployment. Fitch views Canadian banks' direct exposures to energy companies as manageable. However, there may be heightened weakness in areas such as oil field services or other commercial loans tied to energy production.

'Due to the stable Canadian economy over the last few decades, Canadian banks have taken little to no loan provisions over the years. As we move into an uncertain and 'lower for longer' oil price period, Fitch expects to see weakness in loan growth and a rise in provisions for credit losses,' added Gamboa.

As the impact of the oil decline trickles through to other parts of the economy, potentially leading to a rise in unemployment, banks could face credit issues in their retail lending portfolios given high consumer indebtedness. Household indebtedness is high at 165% of disposable income; however, low interest rates have minimized the debt service burden to date. Residential loans, which have been a growth area for Canadian banks as housing prices have skyrocketed, account for most consumer debt.

Fitch views housing markets nationally as overvalued in real terms by approximately 20%. A housing market correction would negatively impact banks in Fitch's view; however, a sizeable amount of this exposure is guaranteed by the Canadian Mortgage Housing Corporation (CMCH), a Crown corporation of the Government of Canada.

Bank profits will be challenging moving forward in 2016 and Canadian banks will likely report modest loan growth, higher credit costs and continued net interest margin pressures. As Canadian banking market shares are mature and relative stable, and as the Canadian economy has started to slow, many of the banks have started to expand into new markets and growth areas such as wealth management and capital markets businesses. This could, however, increase some of the banks' risk profiles and potentially drive negative rating changes.

On Jan. 25, 2016, Fitch completed a peer review of the seven large Canadian financial institutions in its portfolio. Fitch affirmed with a Stable Outlook the ratings of Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Canadian Imperial Bank of Commerce (CIBC), Caisse Centrale DesJardins (DESJ), National Bank of Canada (NBC), Royal Bank of Canada (RBC), and Toronto-Dominion Bank (TD), reflecting our view that Canadian banks' have proven solid operating performance over multiple economic cycles and global shocks. In addition, the Rating Outlook for RBC was revised to Negative from Stable.