Fitch: Canadian Banks Vulnerable to Oil Shock and Housing Correction

(The following statement was released by the rating agency)

NEW YORK, February 22 (Fitch) Canadian Banks fared relatively well through the
2008-2009 financial crisis and have enjoyed a prolonged period of stability;
however, they are likely at an inflection point due to macroeconomic challenges,
says Fitch Ratings. Canada's commodity-reliant economy will be facing challenges
that pose new risks to Canada's major banks if oil prices remain 'lower for
longer' and/or this creates a macroeconomic shock to the economy.

'So far Canadian Banks have been resilient and the oil slump has appeared
manageable but as falling commodity prices permeate the broader economy, banks
will begin to feel pressures beyond direct energy loan exposure,' said Doriana
Gamboa, Senior Director, Fitch Ratings.

Oil production and allied sectors account for 10% of GDP and the decline in
prices has a significant impact on the broader economy and unemployment. Fitch
views Canadian banks' direct exposures to energy companies as manageable.
However, there may be heightened weakness in areas such as oil field services or
other commercial loans tied to energy production.

'Due to the stable Canadian economy over the last few decades, Canadian banks
have taken little to no loan provisions over the years. As we move into an
uncertain and 'lower for longer' oil price period, Fitch expects to see weakness
in loan growth and a rise in provisions for credit losses,' added Gamboa.

As the impact of the oil decline trickles through to other parts of the economy,
potentially leading to a rise in unemployment, banks could face credit issues in
their retail lending portfolios given high consumer indebtedness. Household
indebtedness is high at 165% of disposable income; however, low interest rates
have minimized the debt service burden to date. Residential loans, which have
been a growth area for Canadian banks as housing prices have skyrocketed,
account for most consumer debt.

Fitch views housing markets nationally as overvalued in real terms by
approximately 20%. A housing market correction would negatively impact banks in
Fitch's view; however, a sizeable amount of this exposure is guaranteed by the
Canadian Mortgage Housing Corporation (CMCH), a Crown corporation of the
Government of Canada.

Bank profits will be challenging moving forward in 2016 and Canadian banks will
likely report modest loan growth, higher credit costs and continued net interest
margin pressures. As Canadian banking market shares are mature and relative
stable, and as the Canadian economy has started to slow, many of the banks have
started to expand into new markets and growth areas such as wealth management
and capital markets businesses. This could, however, increase some of the banks'
risk profiles and potentially drive negative rating changes.

On Jan. 25, 2016, Fitch completed a peer review of the seven large Canadian
financial institutions in its portfolio. Fitch affirmed with a Stable Outlook
the ratings of Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Canadian
Imperial Bank of Commerce (CIBC), Caisse Centrale DesJardins (DESJ), National
Bank of Canada (NBC), Royal Bank of Canada (RBC), and Toronto-Dominion Bank
(TD), reflecting our view that Canadian banks' have proven solid operating
performance over multiple economic cycles and global shocks. In addition, the
Rating Outlook for RBC was revised to Negative from Stable.

For more details see the new report titled 'Peer Review: Canadian Banks Macro
Challenges Loom' available by clicking on the link.

Contact:

Doriana Gamboa

Senior Director

+1-212-908-0865

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

Justin Fuller, CFA

Senior Director

+1-312-368-2057

Christopher Wolfe

Managing Director

+1-212-908-0771

Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email:
hannah.james@fitchratings.com.

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

Peer Review: Canadian Banks (Macro Challenges Loom)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=877785

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