Canadian banks will likely find earnings growth harder to come by in the months ahead, as highly levered Canadian households pull back on borrowing, observes Fitch Ratings.
The rating agency said today that it expects Canada’s “Big Six” banks to face a more difficult operating climate in the second half of 2012, after turning in a solid first-half performance. Fitch says it 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 earnings, to put greater pressure on the financial results of the Big Six over coming quarters.”
The banks’ operating results for the first half were stronger than expected, and solid relative to international peers, Fitch notes. It says that loan quality measures remained favourable and charge-off ratios were relatively modest.
“Solid earnings over the last two quarters have been driven by domestic retail and commercial loan volumes, as well as improved capital markets results. Limited provisioning expenses also contributed to earnings growth during the first half,” it says.
That said, it cautions that high Canadian household debt levels could constrain earnings growth in the second half, as the the housing market remains very vulnerable to adverse shocks such as interest rate increases, or deteriorating labour market conditions.
“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,” it says. “Given the sheer size of the consumer loan book on Canadian banks’ balance sheets, 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.”