February 27, 2012 / 4:23 PM / 6 years ago

CORRECTED-(OFFICIAL)-Economy, regulation to test Canada banks in 2012-PWC

Feb 27 (Reuters) - Canadian banks remain the envy of their global peers, but a fragile global economy and myriad regulatory changes will make 2012 a challenging one for growth and profits, PricewaterhouseCoopers said in its annual bank review.

With Canada’s big six banks set to begin reporting first-quarter profits on Tuesday, the accounting and advisory firm warned the banks will likely face a slowdown in lending growth over the next 12 months as consumer debt and an uncertain economic climate in Europe and at home weighs on sentiment.

Looming regulatory changes in the form of Basel III and U.S. legislation under Dodd-Frank will add uncertainty to Canada’s big six banks, which together had C$23.6 billion in profits in 2011 and some of the highest capital levels among global peers.

That capital strength may help the Canadian lenders grow through acquisition and market share as rivals are on the defensive in Europe and the United States, PricewaterhouseCoopers said.

“The challenge is that regulatory uncertainty makes it more difficult to form an opinion on the predictability of earnings, capital consumption and hence values,” John MacKinlay, PwC’s financial services consulting leader said in a statement.

He said the need for many global rivals to recapitalize and release capital consumed by some business lines means there will be buying opportunities for the cash-rich Canadians.

“If you can get yourself past the regulatory uncertainty, the challenge then becomes one of agreeing on price and given the market conditions there is often significant differences of opinion between buyer and seller. As this global restructuring will take years to unfold, the Canadian banks have the luxury of being able to sit on the sidelines and be very selective about their targets,” MacKinlay said.

Domestically, the banks are expected to see a slowdown in loan growth as already-high levels of consumer debt constrain borrowing and stiff competition between the lenders cut into margins.

“Potential earnings are inhibited by the fact that the industry is currently seeing smaller margins on loans and with a ceiling on consumer lending in Canada, the banks are not able to simply increase portfolios to maintain profits,” the report said.

Capital markets businesses will continue to flag as markets remain nervous about Europe, and trading and investment banking growth is expected to decline in 2012, the report found.

Bank of Montreal reports results on Tuesday, with Toronto-Dominion Bank, Royal Bank of Canada, Bank of Nova Scotia, Canadian Imperial Bank of Commerce , and National Bank of Canada reporting this week and next.

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