The ratings firm notes that the Omicron variant, inflation, and the housing market are among potential problems facing banks
Canadian banks could be facing a weaker period of economic growth, rising inflation, and vulnerabilities in the housing market in 2022.
That’s according to ratings firm Fitch which has published its latest outlook for the Canadian banking sector, with a base case for the economy of 3.7% growth in 2022, down from an estimated 5% in 2021.
With fee income expected to slip from recent highs - despite support from strong asset quality, growth in unsecured consumer and commercial loans, plus higher rates – and increased downside risk from the housing market, banks’ financial profiles will decrease moderately.
"The post-pandemic recovery will likely extend well into 2022, contributing to healthy earnings from lower provisions, supportive investment banking conditions and recovering credit demand," said Mark Narron, Fitch Senior Director. "Over the longer term, we expect a moderately weaker operating environment compared to the pre-pandemic period, characterized by elevated private and public sector leverage and a more vulnerable housing market."
Risks ahead
The short-term challenges for the Canadian banking sector include the impact of new coronavirus variants on growth, the effect of inflation on expenses, and policy changes such as the implementation of a 3% surtax on bank profits more than $1 billion.
Rising risks to mortgage quality (amid increased rates) and costs related to Open Banking and digital assets (including perhaps researching the issuance of a digital currency) may provide longer-term disruptive factors.
