Buoyed by continued earnings growth, large Canadian banks are expected to bolster their capital positions in the months ahead, arming them for possible future acquisitions, says DBRS Ltd. in a report published Monday.
The banks generated continued earnings growth in the third quarter, driven by higher revenues, strong expense control, and declining provisions for credit losses, the report says. Overall, third quarter results were strong, underpinning the banks’ existing credit ratings, “balance sheet fundamentals remain solid with sound asset quality and ample risk-weighted capital levels,” the report says.
DRBS expects, “a continued modest capital build-up among the large Canadian banks, which would position the banks well for further acquisitions and/or expected future [risk-weighted asset] increases.”
Collectively, average net income for the big banks increased 5.8% from the prior quarter, and it rose 2.9% year over year, the report says. Asset quality also improved, both quarter over quarter, and year over year, which “largely reflects ongoing improvements in energy-related credits and continued benign credit performance in other portfolios,” the report says.
Rate hikes by the Bank of Canada in both June and September “provide the banks with some tailwinds for future improvements in net interest margin and earnings, especially if the yield curve steepens,” the report adds.
On the cost front, DBRS says that most banks are, “well into implementing initiatives geared toward cutting expenses through lower staffing levels, branch rationalizations, call centre and data warehousing consolidations, and further digitalization of bank operations and processes.”
In terms of possible risks to the banks’ outlook, DBRS says that its primary concern is the housing market, particularly in Toronto and Vancouver, “and the potential impact of a housing downturn to the Canadian economy as well as to other consumer-related loan portfolios.”
Yet, even in the event of a housing market correction, “the large banks appear to be well-positioned to absorb a higher level of provisioning related to home lending, especially given the large level of insured mortgages in their portfolios, as well as conservative underwriting that includes low loan-to-value ratios,” the report says.