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The big Canadian banks reported flat first-quarter earnings as higher provisions and rising expenses offset the boost from higher interest rates, Fitch Ratings says.

In a new report, the rating agency said the big banks’ earnings were down “materially” in the first quarter due to higher provisions at a couple of the banks and acquisition costs at others. Excluding these one-time items, the banks’ earnings were largely flat year over year, it noted.

Revenues in the wealth management and capital markets segments rose across the industry, Fitch said, with wealth management “benefiting from higher net interest income in private banking, which helped offset lower net sales and fee income from the market-driven contractions in assets under management.”

The Canadian personal and commercial banking segment also saw strong revenue growth year over year, it noted, as loan growth remained strong. However, loan growth slowed sharply quarter over quarter, Fitch said, as borrowing demand dropped in the face of sharply higher rates.

Additionally, slower deposit growth and a shift in the mix of deposits resulted in “compressed net interest margin across most institutions,” it said.

Non-interest expenses also grew faster than revenues at most of the banks, Fitch noted, “reflecting personnel costs and an elevated pace of technology investment.”

The banks continued to signal that credit losses are expected to rise toward more normal pre-pandemic levels in the near term, and impaired loan ratios rose “modestly” quarter over quarter, Fitch said.

Yet, average loan loss provisions were “largely flat” from the previous quarter, after rising from their lows in mid-2021, it said.

“Mortgage quality remained largely benign, notwithstanding a housing market correction and materially higher debt service costs for renewing borrowers,” Fitch reported.

The banks’ capital levels also continued their return to pre-pandemic levels, the report said. And the banks indicated that the latest Basel III reforms, which will be implemented in the second quarter, will have a small or moderately positive benefit on their regulatory capital ratios.