Looking back on the third-quarter performance of Canada’s major banks, Standard & Poor’s says the results were the strongest in more than two years.

In its industry report card of major Canadian banks released last week, S&P said that a pickup in corporate finance activity in both debt and equity, drove the stronger results. This led to higher investment banking profits and a revival in retail investor interest that fueled a third straight quarterly increase in commission revenues.

S&P highlighted the importance of improving credit quality at the banks. “Improving credit quality allowed provisions to drop, improving profitability,” it said. “The lower provisioning level also reflects most major Canadian banks’ efforts in exiting high-risk lending since year-end 2002, as large U.S. and foreign corporate loan exposures have been further quelled in an attempt to modify the overall risk profile, but at the expense of diversification.”

Retail lending remained extremely strong, but demand in corporate and commercial lending was weak, S&P said. “Unfortunately, margin pressures from price competition in the domestic personal and commercial banking divisions are more evident as the big five banks all renewed their focus on the domestic business.”

“The credit environment has seen the worst and appears to be stabilizing, but is not without risk of further large single-name blow-ups,” S&P cautioned. “Consumer and middle-market commercial loan portfolios continue to demonstrate stable asset quality. The still-sluggish world economy, including the U.S., and the recent rapid rise in the Canadian dollar, however, has led to some setbacks in credit quality, although isolated and affecting only certain industries. The recent impact of SARS on travel and tourism businesses has also been an issue in Canada, particularly in Ontario.”

“The strength of the big Canadian banks continues to be their solid retail and commercial franchises, which remain strong in earnings performance and asset quality, a reflection of the improving Canadian economy,” S&P concludes. “The balance of 2003 should see further progress in credit quality; possibly higher, although unpredictable, revenues related to capital markets activities; further domestic price competition; and focus on expansion in the U.S.”

S&P said Laurentian Bank was a notable exception to the stronger third-quarter results.