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Canadian Banks' Ratings Affirmed by Fitch, TD Bank Outlook Cut

The ratings of the federal domestic systemically important Canada-based banks -- Bank of Montreal BMO, Bank of Nova Scotia BNS, Canadian Imperial Bank of Commerce CM, National Bank of Canada, Toronto-Dominion Bank TD and Royal Bank of Canada RY – have been reiterated by Fitch Ratings.

The rating agency affirmed Long-Term Issuer Default Ratings (IDR) of BMO, BNS, CM, TD and RY at AA-, while National Bank of Canada’s Long-Term IDR was maintained at A+. Further, the rating outlook for all the banks (except TD) has remained stable.

The rating outlook for Toronto Dominion has been revised to negative from stable because of uncertainties stemming from regulatory investigations into TD's anti-money laundering practices in the United States.

Reasons Behind Ratings Affirmation

Fitch's decision to affirm the ratings reflects confidence in the fundamental strength of Canada-based banks despite facing elevated interest rates. Stable economic conditions are expected to support bank credit fundamentals and financial performance indicators.

Economic Forecasts: Fitch's most recent Global Economic Outlook forecasts Canada’s GDP growth at 1% for 2024, increasing to 1.5% by 2025 and 2026. Unemployment is expected to improve slightly, dropping from 6.2% in 2024 to 6.1% and 6.0% in the subsequent years. Anticipated rate cuts by the Bank of Canada should benefit asset quality and loan growth.

Asset Quality: Credit quality normalization is expected to continue, with gross impaired loans (GIL) ratios expected to trend higher. For second-quarter 2024, the GIL ratio averaged 0.64%, up from 0.59% in the previous quarter and 0.43% in the year-ago quarter. However, it is unlikely to breach 1% sustainably. Commercial real estate, particularly office and multifamily sectors, are identified as areas of risk but remain manageable.

Consumer Loans and Mortgages: The high-rate environment and softer economic conditions may result in continued softness for consumer loans, especially credit cards and unsecured loans. Yet, residential mortgage loans are performing well due to low loan-to-values, stable employment levels and a housing shortage.

Profitability and Capital Buffers: Despite increased loan loss provisions (LLPs), profitability remains stable as Bank of Montreal, Bank of Nova Scotia, Canadian Imperial, National Bank of Canada, Toronto-Dominion and Royal Bank of Canada have improved efficiency through cost controls. Strong revenue performance in domestic banking, capital markets and asset management has offset higher LLPs and slowing loan performance.

Fitch noted that Canadian banks have shown positive trajectories in liquidity and capital buffers. The average liquidity coverage ratio was 135% in the second quarter of 2024, up from 130% in fourth-quarter 2022. Most banks ended the second quarter with common equity Tier 1 ratios above 13%, except for RY at 12.8%.

Conclusion

Fitch's affirmation of ratings signifies a vote of confidence in the robustness and resilience of Canada-based banks despite certain challenges and uncertainties ahead.

At present, Bank of Nova Scotia, Canadian Imperial, Toronto-Dominion and Royal Bank of Canada carry a Zacks Rank #3 (Hold), while Bank of Montreal has a Zacks Rank of 5 (Strong Sell).

You can see tthe complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Bank Of Montreal (BMO) : Free Stock Analysis Report

Toronto Dominion Bank (The) (TD) : Free Stock Analysis Report

Royal Bank Of Canada (RY) : Free Stock Analysis Report

Canadian Imperial Bank of Commerce (CM) : Free Stock Analysis Report

Bank of Nova Scotia (The) (BNS) : Free Stock Analysis Report

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