Operating performance for the major Canadian banks in first-quarter 2004 was mixed says Standard & Poor’s in its latest Canadian Banks Report Card.

Despite net earnings at the six major Canadian banks (consolidated) increasing by more than 11% from the previous quarter), revenue growth was lackluster, and competition intensified in a number of retail products.

Adding pressure to profitability was the further weakening of the U.S. dollar, which affected the banks that do not hedge for currency risk with the greatest proportion of earning assets denominated in U.S. dollars.

S&P notes that challenging revenue growth had the banks focused on driving costs down to boost profitability as corporate and commercial loan demand remained soft. Meanwhile residential mortgages, personal loan growth, and credit cards remained strong against a backdrop of fierce competition with the major Canadian banks all vying for these businesses.

The ratings agency says the banks are all positioned for rising interest rates and should benefit in 2004, although the intense competitiveness will keep the pressure on the net interest margin.

S&P adds that the credit environment continued to improve, allowing provisions for loan losses to further drop, helping overall profitability. The lower provisioning level reflects most major Canadian banks’ efforts in exiting high-risk lending since year-end 2002 in an attempt to modify the overall risk profile, but at the expense of diversification.

Buoyant capital markets continued to benefit trading revenues, underwriting fees, brokerage operations, and mutual funds sales.

S&P observes that the banks continued to build on their capital positions and are preparing themselves for the possibility of presenting domestic merger proposals as early as fall 2004.

It adds that U.S. strategies are being revisited, as the Canadian banks recognize that it might not make e sense to plow capital into small to midsize acquisitions in the U.S., as benefits would be greater from an in-market merger versus an out-of-market merger. It notes the banks have experienced mixed results in the U.S. to ventures that have failed, as returns on investments have generally been disappointing