Canadian banks enjoyed strong earnings performance in the first quarter driven by retail banking, higher than expected trading revenues, and improvements in loan loss provisions, DBRS Ltd. said in a report released Wednesday.

In the domestic retail banking business, mortgage lending continued to grow during the quarter. DBRS said that it believes that new measures announced by the federal government in an effort to cool the housing market, which take effect in April, “will not have a material impact on loan demand”. It says that higher interest rates will be a bigger factor, and they “do not appear imminent”, it adds.

At the same time, net interest margins expanded on a quarter-over-quarter basis, it said, primarily due to re-pricing initiatives started in 2009. DBRS expects net interest margins to remain fairly constant, as much of the improved loan pricing is now complete, however, it adds that when rates start rising, that should have positive implications for margins.

“Loan loss provisions were sequentially better and appear to have peaked in [the third quarter of 2009],” it also observed. DBRS said it expects credit costs to remain elevated for the remainder of the year, “albeit with some improvement as the year progresses.”

On the investment side, wealth management revenues were up, as the market rebound drove assets under management higher. And, it says that “money that had moved into deposits and away from equity assets during the last two years is returning”.

DBRS says the banks’ capital markets businesses have benefited from the volatility in the markets, and the widening of bid-ask spreads, “resulting in very strong trading revenue, particularly interest rate and foreign exchange.”

IE