Fitch: Tough winter for Canadian mortgage lenders

“We expect retail growth to decelerate in the second half of 2012 as the housing market cools and new regulations aimed at curbing residential lending take effect,” write analysts at Fitch Ratings, in their latest assessment of the country’s commercial banking sector. “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 earning, to put greater pressure on the financial results of the Big Six over the coming quarters.”

The report comes at the heels of a recent CMHC warning that the market is headed for a “moderate slowdown” in the coming year.

“Canada’s housing markets are expected to moderate over the rest of 2013 and into 2013 and showing sustained activity levels specifically in the multiples segments, over the first half of 2013,” said Mathieu Laberge, deputy chief economist for CMHC. “Balance market conditions in most local housing markets will result in a slowing in house price growth as well.”

At least one major Canadian bank had earlier warned that the market could be looking at a decade-long slowdown.

"Canada's housing market is expected to avoid the sharp downturn witnessed in the United States and Europe," said Adrienne Warren, a senior economist at Scotiabank. "However, the downside risks to domestic housing activity are increasing. The full impact of the slowdown may not become fully visible until mid-decade."

Warren said pent-up demand had been exhausted after 10 years of housing boom.

Fitch’s forecast contrasts the banks’ performance in the first half of 2012.

“Solid earnings over the last two quarters have been driven by domestic retail and commercial loan volumes, as well as improved capital market results,” according to Fitch. “Limited provisioning expenses also contributed to earnings growth during the first half.”

According to Statistics Canada, household debt continues to drag the banks down. Household debt-to-income ratios hit an average 154.3 per cent during the first quarter of the year.

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