The latest earnings announcements of Canada’s big banks reveal intensifying competitive pressure among lenders, and persistent household debt risks, says Fitch Ratings in a new report.
The rating agency says that increasing pressure on Canadian banks’ net interest margins and asset yields is evident in their latest quarterly operating results. For example, it notes that Royal Bank of Canada’s net interest margin (NIM) dropped seven basis points (bps) from the previous quarter, and is down six bps from a year ago. Similarly, Bank of Montreal’s NIM dropped eight bps from the prior quarter, and is down 14 bps on an annual basis, it says.
Fitch says that these margin and spread pressures indicate that competition among lenders is heating up. It also says that growth in consumer loan balances aren’t showing any signs of moderating.
“Moving into 2014, we see the high level of consumer indebtedness in Canada as a significant risk factor for Canadian banks,” it warns. “However, there is no evidence in this week’s bank results that an orderly process of consumer deleveraging is underway. To the contrary, loan growth rates for mortgages, home equity loans and other types of consumer loans were again high in the fiscal fourth quarter.”
Fitch notes, for example, that CIBC had new mortgage growth in its own branded portfolio of 5.16% from the previous quarter; BMO saw 3.24% growth; and, TD experience a 2.37% increase.
“The level of provisioning reported by Canadian banks remains modest, given credit quality trends,” Fitch says. “Good asset quality performance continues to reflect the strength of Canadian house prices, which have continued to rise despite signs of overvaluation in markets like Vancouver and Toronto.”
It also says that pressure on asset yields was largely offset by improvements in wealth management, as all banks have benefited from a strong market environment in 2013. “Acquisitions in the U.S. have also helped boost wealth management performance,” it says; whereas, wholesale banking results “have been more mixed, with banks primarily serving the domestic Canadian market reporting weaker results last quarter.”
Fitch notes that the announcement that RBC’s CEO, Gord Nixon, will step down next year is the third big bank CEO to make this sort of move this year. TD’s CEO Ed Clark has announced that he will retire in November 2014, and Scotia’s CEO recently retired too. “While these leadership changes are not a ratings issue, their timing is interesting in light of the industry challenges now facing Canadian banking,” it concludes.