RPT-Fitch: Canadian Banks Face Margin Pressure as Loan Volumes Rise

Fri Dec 6, 2013 9:04am EST
 
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Dec 6 (Reuters) - (The following statement was released by the rating agency)

Increasing pressure on Canadian banks' net interest margins and asset yields indicates that competition among lenders is heating up, and growth rates in consumer loan balances show no signs of moderating, according to Fitch.

Margin and spread pressure has been largely evident in the quarterly operating results of five of the six largest Canadian banks this week. This reflects somewhat weaker asset yields and more intense competition for new loan business in the Canadian market. For example, Royal Bank of Canada's (RBC) net interest margin (NIM) dropped 7 bps from the sequential quarter and 6 bps from the year-ago period, and similarly Bank of Montreal's (BMO) NIM dropped 8 bps from the sequential quarter and on an annual basis declined 14 bps.

Moving into 2014, we see the high level of consumer indebtedness in Canada as a significant risk factor for Canadian banks. 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.

Canadian Imperial Bank of Commerce (CIBC) had new mortgage growth in its CIBC branded portfolio of 5.16% from the sequential quarter, for BMO 3.24% from the sequential quarter, and a 2.37% increase from Toronto-Dominion Bank (TD).

Asset yield pressure was offset to a large degree by the expected improvement in wealth management, where all banks have benefited from a strong market environment in 2013. Acquisitions in the U.S. have also helped boost wealth management performance. Wholesale banking results, on the other hand, have been more mixed, with banks primarily serving the domestic Canadian market reporting weaker results last quarter.

The level of provisioning reported by Canadian banks remains modest, given credit quality trends. 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.

The announcement by RBC CEO Gord Nixon that he will step down next year is the third such move by a Canadian bank CEO in 2013. TD's CEO Ed Clark has announced that he will retire in November 2014, and Scotia Bank's CEO recently retired. While these leadership changes are not a ratings issue, their timing is interesting in light of the industry challenges now facing Canadian banking.

For a detailed review of the credit outlook for Canadian banks, and a discussion of potential risks in bank operating profiles, see "2014 Outlook: Canadian Banks," dated Nov. 25, 2013, at www.fitchratings.com.