Fitch Completes Review of Canadian Banks

Fitch Ratings has affirmed the ratings of the seven largest Canadian banking institutions by assets (referred to as Canadian Banks) following a peer review. The seven financial institutions included in this peer review are as follows: Bank of Montreal (BMO; rated 'AA-/F1+'), Bank of Nova Scotia (BNS; rated 'AA-/F1+'), Canadian Imperial Bank of Commerce (CIBC; rated 'AA-/F1+'), Caisse Centrale DesJardins (CCD; rated 'AA-/F1+'),National Bank of Canada (NBC; rated 'A+/F1'), Royal Bank of Canada (RBC; rated 'AA/F1+') and Toronto-Dominion Bank (TD; rated 'AA-/F1+').

The Rating Outlook for RBC has been revised to Negative from Stable. This Outlook revision is driven by Fitch's view that RY's credit performance and future earnings volatility may be higher than Canadian bank peer averages as well as in comparison to similarly rated global financial institutions. In addition, RY's tangible capital ratios, while satisfactory and supportive to the rating, compare less favorably to other similarly rated financial institutions. For complete discussion, please see full release on Royal Bank of Canada dated Jan. 25, 2016.

The Rating Outlook for BMO, BNS, CIBC, CCD, NBC and TD is maintained at Stable. The Stable Outlook is supported by Fitch's view that Canadian banks have solid fundamentals evidenced by their consistent performance through various downturns and global shocks. Further, the banks have good funding profile with strong access to wholesale funding and solid capital positions.

Although Fitch recognizes that the Canadian banking sector is likely at an inflection point in terms of performance, the expectation remains that Canadian banks will continue to compare favorably versus global peers, which continues to support their high ratings level.

Nonetheless, Fitch remains cautious given the negative trends in macro-economic factors. As such, all Canadian Banks are vulnerable to credit deterioration in their domestic loan portfolios, particularly at a time when consumer indebtedness is at record high levels. Further, Fitch believes that the Canadian housing market is overvalued by over 25% creating some downside risk. Importantly, the Canada Mortgage and Housing Corporation (CMHC) insures a large portion of the mortgages on bank balance sheets, which means that any wider systemic risks will more likely have implications for the sovereign.

For now, these risks have been manageable given the steady unemployment rate, low interest rate environment, and low inflation. However, should the rapid decline in global oil and gas prices pressure the broader economy in Canada that leads to a sharp rise in unemployment, Fitch believes credit deterioration could be hastened. Fitch has highlighted asset quality deterioration as a rating sensitivity for ratings for all Canadian banks.

In Fitch's view, most of the Canadian banks direct exposure to oil & gas lending appears manageable when compared to total loans. Nonetheless, banks could still be susceptible to losses should the oil price find an equilibrium point much lower than stress tests have indicated and if it takes multiple years for oil price to recover.

For 2016, Fitch believes most Canadian banks earnings will be challenged given the view that provision expenses will likely increase, the persistent low rate environment, and economic pressures in their home market. For further discussion, please refert to the Canadian Bank Peer Review Special Report, which Fitch intends to publish shortly.

Additional information is available at 'www.fitchratings.com'.

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