Canadian banks are facing slower retail revenue growth, tighter margins, and weaker earnings growth in the year ahead, which could lead them to take on more risk in order to combat these trends, says a new report from Standard & Poor’s Ratings Services.
The banks first quarter results generally met S&P’s expectations, says a report published Thursday.
S&P says that while the banks generated increased activity in commercial lending, wealth management, and mergers and acquisitions in the first quarter, revenue and net earnings growth from the banks’ domestic retail lending businesses continued to slow and retail margins are thinning. And, it expects these trends to continue in the year ahead.
“Given a backdrop of a soft domestic economy, we expect Canadian banks’ overall revenue and loan growth to slow to mid single-digit levels in 2013 from 9% and 10% growth, respectively, in 2012,” it notes, as high household indebtedness starts to curb the appetite for credit growth.
S&P suggests that these will be powerful headwinds for the banks to overcome in the years ahead. “In our view, key to combatting constrained retail earnings growth will be the banks’ ability to effectively cut costs and thoughtfully boost revenues from other businesses without unduly increasing risk,” it says. “We believe that tougher domestic and global economic conditions and tighter domestic pricing competition will lead to slowing profitability growth in 2013.”
On the positive side, it sees potential for higher revenue contributions from the business lines that have showed signs of picking up (commercial lending, wealth management and M&A). “The possibility of rising equity markets and a stronger M&A pipeline could add to the Canadian banks’ overall revenue contributions in 2013. We believe that the banks might bump up their revenues from other capital markets-related businesses, including trading, to make up for revenue lost in retail banking.”
S&P’s credit outlooks on the Canadian banks are currently stable. However, it also says that they could come under pressure if the banks increase risks to compensate for slowing retail lending revenues without a corresponding increase in capital. Also, if “heightened industry and economic risks lead to a material drop in revenues and earnings and a substantial increase in loan losses (notably above historical levels) for Canadian banks, we could lower individual ratings,” it says.