RBC Financial Group economists admit that they blew part of last year’s forecast for the financial industry, including a forecast for strong mutual fund sales. The group’s Financial Industry Monitoring Service December report, prepared by assistant chief economist Derek Holt, forecasts better performance in the coming year.

“Areas where our industry forecasts performed reasonably well over fiscal 2002 include consumer loans, credit cards, residential mortgages, current accounts, long-term business financing, as well as household and business credit quality patterns,” the report notes, but RBC acknowledges that its calls for short-term business lending were off because the research was conducted before the impact of terrorist attacks in the United States could be evaluated.

The group also admits that it goofed on personal deposits, which surprised heavily on the upside, and mutual fund sales, which were weaker than expected.

RBC expects deposit growth to trail off in the coming year as the investors build up an appetite for risk.

“Our view is that the continued dumping of mutual funds is about as irrational as the frenzied purchases of the bubble years. There is value in the market for the patient long-term investor, but the mass sell-off over the spring and summer months was mostly due to corporate governance and accounting problems at a handful of companies. Broad indexes remain undervalued by most estimates except price-earnings ratios that incorrectly use trailing earnings,” the report notes.

The report also observes that jousehold and business credit quality improved this year, in line with its forecasts. “Household credit quality will likely improve further into 2003 and part of 2004 before a rising rate environment starts to crimp gains and feed a deterioration in the total debt service burden towards the end of 2004 but mostly into 2005. Business interest coverage likely has further room for improvement with a continued profit recovery,” says RBC.

It also predicts that the industry theme over the past fiscal year of strength in personal banking products versus weakness in business lending will likely become much more balanced into fiscal 2003. “Consumer lending activity is expected to continue growing strongly despite an expected slow down in housing markets and auto sales that will nonetheless remain at high volumes of activity. Businesses are likely to see inventory positions and overall working capital financing positions rise amidst an ongoing profit recovery.”