Weaker financial results among Canadian banks are expected to persist for the rest of the year due as loan growth lags, according to a new report from Standard & Poor’s.

In its third-quarter report card on Canada’s banks, S&P says that commercial and industrial loan growth has been weak as most companies have been issuing debt in the bond market.

The report notes that third quarter results at most banks suffered from weaker performance of the investment and wholesale banking and wealth management businesses due to softer equity and capital market activities. The third quarter reflected slower equity issuance and trading activities contributing to lower capital markets-related revenues.

Retail banking remains the bulwark of the Canadian banking industry, the rating agency says, “although profitability remains challenged due to margin-spread compression as competition in certain retail banking products remains intense and pricing on deposit liabilities reached a trough some time ago. Slightly higher interest rates would provide some relief on pricing deposit liabilities and improve retail banking profitability.”

Stronger credit quality has also flowed through to the large, foreign corporate loan book in the past year, which has helped to lower provisioning requirements and boost profitability, S&P notes. But, this now offers little room for additional benefits, it says. “In fact, provisions for loan losses may begin rising as strong consumer loan volumes remain steadfast.”

S&P notes that the banks are continuing to release reserves but at a slower pace than in the past. But, it does not consider the banks to be under provisioning when releasing reserves because the healthier corporate loan portfolios support less reserve protection in the current credit cycle.

“With a minority government in place and the diminished likelihood of domestic mergers, banks have been redeploying built-up capital more actively through increases in dividends, share buybacks, and expanding their presence outside Canada, or through shifting to less capital-intensive business such as retail banking,” S&P notes.

It says that TD Bank’s acquisition of Banknorth Group Inc. is an example of the Canadian banking industry’s “growing frustration with the Canadian government and the industry’s desire to build international presence despite mixed results to date and overall disappointing returns on investments in the U.S.” S&P says that the Canadian banks’ increased focus outside Canada is “their response to the limited organic growth possibilities due to the mature domestic retail banking market, which also is highly competitive and saturated.”