TEXT-Fitch on Canadian banks

(The following statement was released by the rating agency)

Aug 20 - Canada's "Big Six" banks are expected to face a more difficult operating climate in the second half of 2012, after turning in a solid first-half performance. Fitch expects high leverage levels in the Canadian household sector, driven by mortgage credit expansion and a frothy housing market, in addition to margin pressure and reduced capital markets-related earnings, to put greater pressure on the financial results of the Big Six over coming quarters. First-half operating results for the six largest Canadian banks were stronger than expected and solid relative to international peers. Loan quality measures remained favorable and charge-off ratios were relatively modest. Together with stable funding positions and sound capitalization, first-half results continue to support our view that the credit profiles of the Big Six remain stable. Solid earnings over the last two quarters have been driven by domestic retail and commercial loan volumes, as well as improved capital markets results. Limited provisioning expenses also contributed to earnings growth during the first half. Still, high Canadian household debt levels could constrain earnings growth for the Big Six in the second half of 2012. According to Statistics Canada, household debt-to-income ratios hit an average of 154.3% in the first quarter of 2012, highlighting the sensitivity of the housing economy to adverse shocks such as interest rate increases or deteriorating labor market conditions. We expect retail loan growth to decelerate in the second half of 2012 as the housing market cools and new regulations aimed at curbing residential lending take effect. Given the sheer size of the consumer loan book on Canadian banks' balance sheets, continued earnings improvement in commercial lending may not offset the slowdown on the retail side. Furthermore, earnings from capital markets and wealth management activities are expected to trend downward as heightened global uncertainty, mostly related to Europe, started eroding investor confidence in April. For a detailed review of first-half operating results at the largest Canadian banks, see "Canadian Banks: 1H12 Results and Midyear Outlook," dated July 16, 2012, at www.fitchratings.com. Banks reviewed in the report include Bank of Montreal (BMO), Bank of Nova Scotia (Scotia), Canadian Imperial Bank of Commerce (CIBC), National Bank of Canada (NBC), Royal Bank of Canada (RBC), and Toronto Dominion Bank (TD). (Caryn Trokie, New York Ratings Unit)