The Big Six banks are well-positioned for 2022, according to analysis from DBRS Morningstar.
The rating agency found that continuing reversals of provisions for credit losses boosted earnings in the fourth quarter, though the pace of those reversals has also continued to slow.
“Higher interest rates should help offset some expected pressure to earnings in 2022, as reversals of [provisions for credit losses] on performing loans are expected to decrease from 2021 levels and capital markets activity is expected to remain more subdued compared with the elevated levels in the first half of 2021,” the report said.
Higher mortgage lending also supported the banks in the fourth quarter, though DBRS remains concerned about housing market imbalances.
Canadian real estate secured lending volumes increased by 2.5% from the third quarter and by 10.6% year over year for the Big Six, with Bank of Nova Scotia and CIBC showing above-market growth over both periods.
Non-real estate lending volumes, however, remain well below pre-pandemic levels, particularly at National Bank.
In 2022, “higher interest rates will benefit the banks’ net interest income, helping to mitigate wage cost pressures and normalizing capital markets revenues,” the report said.
“In addition, the balance sheets of these banks remain strong with robust capital and liquidity metrics, although capital metrics will likely decline from current levels with the resumption of capital management activities.”
A report from Fitch Ratings released earlier this week predicted that Canadian banks would likely see deterioration in their financials in 2022, but the agency also expects the banks’ fundamentals to hold up as the economic backdrop weakens.
In terms of ratings for the Big Six, DBRS Morningstar said the five largest banks are stable, while National Bank is trending positive. The Big Six’s long-term issuer ratings in particular range from AA (low; National Bank) to AA (high; Royal Bank of Canada and Toronto-Dominion).