Fitch: Canadian Banks Face Energy Threats from Consumer Crunch and Alberta

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings expects the cost of credit to rise in Canada as banks feel continued pressure from the slow recovery of oil prices impacting Alberta and other oil provinces and concerns about record consumer debt levels, according to Fitch's latest North American Financial Institutions Chart of the Month.

"Canadian banks have a sizable exposure to energy lending, however Fitch views this as manageable and a bigger impact on earnings rather than capital," said Doriana Gamboa, Senior Director, Fitch Ratings. "The rating outlook is neutral for Canadian Banks so far as any losses are unlikely to erode the diversified business mix and generally solid loss-absorption buffers."

Funded direct exposure to energy lending has been manageable, accounting on average for 2.3% of total loans and 33% total tier common equity tier 1 (CET1). Canadian bank exposures seem relatively higher as a percentage of CET1 compared to U.S. banks. Notably, banks have a sizable exposure to oil field services, which tend to have higher loss content than traditional energy & power companies. For Canadian banks, Fitch expects downward credit migration to impact earnings but not necessarily capital although risk weighted averages (RWAs) could increase.

"Consumer credit health is a concern due to the record household debt levels and energy pressure on consumer loan portfolios in oil provinces which is pushing up delinquencies in auto lending and credit cards," added Gamboa.

Alberta and other oil provinces are showing signs of stress. In March 2016, Alberta's unemployment rate jumped to 7.1% (in line with the national average) compared to 5.9% in March 2015. For Canadian banks, exposure to Alberta and oil provinces on average has been 15% of Canadian loans. However, excluding insured mortgages, the figure declines to an average of about 8%.

Strong asset quality, robust housing demand, and low interest rates offset some of the pressure for the Canadian banks. However, if sustained energy price declines dampen economic activity, Fitch expects to see broader consumer lending asset quality deterioration.

Additional information is available on www.fitchratings.com

North America FI Chart of the Month

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881193

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160509005956/en/

Fitch Ratings
Doriana Gamboa
Senior Director
+1-212-908-0865
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Media Relations:
Hannah James, +1 646-582-4947
[email protected]

Source: Fitch Ratings

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