Canadian banks will face continuing economic and competitive pressures this year, tougher regulations, and downside risks, says a new report from Standard & Poor’s Ratings Services.
The rating agency says that it expects these factors to “temper earnings growth across the sector” and add to the importance of operational and competitive effectiveness in terms of the banks preserving their credit ratings.
“In light of our expectations for weak economic growth prospects for Canada in 2013, we anticipate overall loan and revenue growth will slow due to softer demand for credit,” said Standard & Poor’s credit analyst, Thomas Connell. S&P believes that tighter margins and higher loan loss provisions will modestly hinder earnings growth, but it also expects the banks’ generally good asset quality metrics to continue.
S&P says that net interest margins in the banks’ personal & commercial businesses will remain under pressure, due to both prolonged low interest rates and intensifying competition. And, as a result, it suggests that the banks may undergo an increase in their risk tolerance to compensate for lower profitability, which could see them “reaching for yield through investment holdings, more aggressive lending in higher-yielding categories such as credit cards or business loan, or potentially a pickup in acquisitions.”
At the same time, it also expects the Canadian banks to continue to reduce costs. “We expect that expense control will partially offset slower revenue growth in 2013,” it says.
And, while it says that the economic risks to the Canadian banking sector remain relatively low by global comparison, those risks are to the downside, mainly due to the fact that household debt has risen to record levels, increasing Canadian households’ vulnerability to sudden shocks in incomes, employment, or a spike in interest rates.
It cautions that “Canadian consumers’ high average debt levels contribute to the potential for a more pronounced downturn in Canadian bank performance, should recessionary conditions return.”
That said, S&P’s rating outlooks across the Canadian banking industry are currently stable. “Should heightened industry and economic risks lead to a material drop in revenues and earnings and a substantial increase in loan losses (notably above historical levels) for Canadian banks, we could lower individual bank ratings where warranted,” it says.