Despite the elevated economic uncertainty, the outlook for the big Canadian banks for the remainder of 2022 remains positive, according to a new report from DBRS Morningstar.
The rating agency noted that the Big Six banks enjoyed a strong start to fiscal 2022, despite continued headwinds posed by the pandemic, inflation, and supply chain disruptions. First quarter earnings were up 11.6% on an aggregate basis, quarter over quarter, and up 17.1% year over year.
“Quarterly earnings were boosted by higher revenues from volume-driven growth in interest income, increased trading revenues and fee-based income, and underwriting and other advisory activities,” the report said.
Looking ahead, DBRS said that rising interest rates and growth in higher margin loans (credit cards and auto loans) are expected to boost profitability, and help offset the potential increase in credit loss provisions from historically low levels.
However, economic uncertainty has increased due to Russia’s invasion of Ukraine, which may reduce global GDP growth.
At the same time, high household debt levels remain a concern too.
“In a rising interest rate environment, the magnitude and pace of interest rate increases could translate into credit-quality concerns and potential credit losses from higher debt-servicing costs, offsetting the benefit of higher rates on profitability,” said Carl De Souza, senior vice president, North American financial institutions group at DBRS, in a release.
“This concern would be amplified if a rapid tightening cycle and/or Russia’s invasion of Ukraine were to lead either the U.S. or the Canadian economies into a downturn,” he added.
Still, the banks’ balance sheets remain strong, “with robust capital and liquidity,” DBRS said.