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TORONTO (Reuters) - Canada's banks should expect earnings growth to slow this year compared with 2011, but the sector should continue to outperform its international peers, debt ratings agency Fitch said on Tuesday.
In a report, Fitch said the banks' earnings deteriorated in late 2011 due to slowing loan growth, unpredictable capital markets revenue, and narrow lending margins due to low interest rates.
"The deceleration in earnings growth started in 2011 is likely to continue in 2012," it said.
The agency maintained a "stable" rating on the sector, but highlighted risks from the European debt crisis, as well as record high consumer debt levels in Canada that raise the possibility of a spike in loan delinquencies, which could undermine the housing sector.
"Should delinquencies in the domestic retail loan book increase beyond expectations, the ratings could come under pressure," Fitch said.
Such a situation could be triggered by a sharp rise in unemployment, Fitch said, but added that the chances of such a shock, while higher than a year ago, are low.
Indeed, while the outlook may have deteriorated for the banks, their position of strength relative to global rivals seems secure, the agency said.
Canadian banks emerged from the 2008 financial crisis in strong shape, and have taken advantage of the weakness among global rivals by buying up distressed assets cast off by U.S. and European banks.
Fitch said it expects the sector to maintain "sound quality asset metrics" ahead of global peers over coming periods.
It also expects the banks to meet new Basel III capital rules by the end of 2012, ahead of a deadline by Canada's financial services regulator.
Reporting By Cameron French; editing by Rob Wilson