OREANDA-NEWS. December 14, 2015. While an unsustainable housing market, macroeconomic pressure from declining energy prices, and low interest rates will challenge the Canadian baking sector in 2016, the sector rating outlook is stable due to a sound profitability profile, according to a new Fitch Ratings report.

'Canadian Banks are challenged by the record level of consumer indebtedness, unemployment concerns from depressed energy prices, and the risk of overvaluation in the housing market, which has so far been kept in check by steady employment levels and low interest rates,' said Doriana Gamboa, Senior Director at Fitch Ratings.

Despite the negative sector outlook, Fitch expects the credit profile of the major Canadian banks to be stable due to consistent earnings performance, solid balance sheets and supportive regulatory policy. However potential risks could rise as the banks expand geographically and into wealth management and capital markets businesses.

Fitch views the booming housing market in Canada as unsustainable and a looming price correction will pose a risk to banks, particularly if unemployment increases due to low energy prices. Fitch sees these risks as manageable, however, since banks' underwriting models soften the impact of a home price correction and the Canada Mortgage and Housing Corporation (CMCH) insures a large portion of the mortgages on banks' balance sheets.

Due to the sluggish economy and low interest rate environment, Canadian bank profit will be slow and modest in 2016. Banks will likely report higher credit losses, continued margin pressure and only modest loan growth in the next year.

The full report '2016 Outlook: Canadian Banks' is available at 'www.fitchratings.com.'