Canadian banks will come under increased pressure as revenues from key businesses such as consumer lending and capital markets start to decline over coming quarters, Fitch Ratings warned on Monday.

The rating agency said it expects high consumer debt levels, primarily from mortgage borrowing combined with broad-based margin pressure, to weigh heavily on big banks’ financial results going forward.

We expect retail loan growth to decelerate in the second half of 2012 as the housing market cools

“We expect retail loan growth to decelerate in the second half of 2012 as the housing market cools and new regulations aimed at curbing residential lending take effect,” Fitch said.

“Given the sheer size of the consumer loan book on Canadian banks’ balance sheet, continued earnings improvement in commercial lending may not offset the slowdown on the retail side. Furthermore, earnings from capital markets and wealth management activities are expected to trend downward as heightened global uncertainty, mostly related to Europe, started eroding investor confidence in April.”

The comments come a week before the banks begin to report third quarter results.

Lenders performed well over the first half of the year, largely on the back of higher consumer loan volumes and stable provisions for bad loans. But household debt-to-income is sitting at a record 154.3%, according to Statistics Canada. That has left the economy vulnerable to adverse shocks such as a spike in unemployment, which would have significant negative implications for lenders.

While the banks have mostly protected themselves from the risk of mortgage default through Canada Mortgage and Housing Corp. insurance, they continue to have significant uninsured mortgage exposure.