Canadian banks face profit pressure at home

Sun Jun 17, 2012 10:38am EDT
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By Cameron French

TORONTO (Reuters) - For Canadian banks, slowing domestic loan growth and narrowing lending margins threaten the double-digit profit gains that have become routine in recent quarters, adding to the generalized pressure being exerted on the sector by Europe's debt crisis.

The slowdown has arrived at a particularly inopportune time for the Canadian banks as the euro crisis threatens to roil bank stocks around the globe. Rather than flocking to Canada's conservative banking sector - often described as the world's soundest - some equity investors may instead gravitate to U.S. lenders, which may have a higher upside when markets eventually recover.

"What we're seeing here is the early indications of the domestic consumer lending slowdown that everyone has been watching for," said Barclays Capital analyst John Aiken, pointing to earnings figures for the most recent quarter.

While few are predicting a marked drop in profits for the sector, the prospect of flattening growth is a significant shift for a bank industry that has long enjoyed robust loan expansion at home, allowing it to churn out billions in quarterly profits.

"Canadian loan growth simply will not be the tailwind for the core domestic banking business as it has for the Big Six (banks) in the last decade," said Todd Johnson, a portfolio manager at BCV Asset Management in Winnipeg, Manitoba.


Canada's banks emerged from the 2008 financial crisis without having to take U.S.-style bailouts, and have taken advantage of the decline of several U.S. and European rivals, buying up bargain-priced assets and poaching investment bankers.

But their domestic consumer-banking franchises have long been the core of their profit engines.   Continued...

A Royal Bank of Canada (RBC) sign is seen in downtown Toronto, March 3, 2011. REUTERS/Mark Blinch