DBRS 2012 Canadian Banking Outlook: Strong Capital, Slower Earnings Growth
DBRS believes Canadian banks have earnings resilience, according to a commentary published today, because of the strength and diversity of their franchises. The six largest Canadian banks have strong capital levels, which DBRS expects will position them positively for the implementation of Basel III capital rules in 2013 and to weather any economic headwinds that come their way.
“The quality of the capital structures of Canadian banks is expected to continue to improve with the ongoing redemption of innovative Tier 1 instruments and preferred shares,” says Brenda Lum, Managing Director. Until the beginning of 2013, Canadian banks have the opportunity to issue subordinated debt (Tier 2 capital) and preferred shares (Tier 1 capital) without a non-viable contingent capital feature as long as the instrument meets all other Basel III requirements.
DBRS anticipates earnings growth in 2012 to be slower given the low interest rate environment, the slow growth of the North American economies, the highly competitive consumer environment and the uncertain European economic outlook. Nevertheless, DBRS believes Canadian banks have earnings resilience because of the strength and diversity of their franchises, including their retail banking segments, which underpin the ratings of the six largest Canadian banks.
“The domestic retail businesses of Canadian banks are expected to continue to produce solid results,” explains Ms Lum, “but consumer borrowing is slowing as a result of weakening consumer confidence and de-leveraging.” From a ratings perspective, the strength and diversity the domestic retail banking franchises of the largest six Canadian banks anchor their ratings.
A copy of this commentary is available by contacting us at info@dbrs.com.