Big banks could see growth slip amid low interest rates, trading revenues

They are also coping with lower investment and trading revenues as investor confidence remains battered by global economic uncertainty.

Analysts say those headwinds will eat into bank earnings in 2012 and some banks have already started to raise rates and cut costs to compensate for slower growth.

Bank of Montreal (TSX:BMO) is first to report Tuesday followed by Royal Bank of Canada (TSX:RY) and Toronto Dominion Bank (TSX:TD) on Thursday and National Bank (TSX:NA) on Friday. Scotiabank (TSX:BNS) and CIBC (TSX:CM) will report their earnings next week as all the banks report under the new international financial reporting standards for the first time.

But some of those headwinds that could cause a slowdown in revenue growth — such as lacklustre borrowing and consumer spending — may not materialize until after the first quarter, said Barclays Capital analyst John Aiken.

“It does not appear that the Canadian consumer pulled their foot off the gas, at least for the first fiscal quarter,” Aiken noted.

“We remain cautious on our midterm outlook as slowing consumer spending, which remains more than likely, will have a significant impact on the banks’ ability to grow revenues.”

As a result, he expects much lower growth at the big banks for all of 2012.

Lending for mortgages, lines of credit and other loans continue to be spurred by low interest rates — both for variable rates tied to the Bank of Canada’s overnight rate and fixed rates tied to bond yields.

During the first quarter, many banks engaged in pricing wars, offering close to record low fixed-rate mortgages to draw consumers through their doors.

But the low interest rates have also been eating into net interest income, shrinking margins between the amount of money banks make on loans versus what they put out on deposits. Most also posted declines in their capital markets divisions as they contended with volatile market conditions that affected revenues.

Banks had expected a ramp-up in business borrowing to offset some of the decline in the personal lending business.

However, early indications suggest business lending volumes remain weak, “and the economic environment is likely to weigh on margins and keep trading revenues depressed,” Aiken said.

Aiken said he expects quarterly earnings growth of 12.6%, but a 1.3% decline year-over-year.

Robert Sedran, an analyst at CIBC World Markets expects seven per cent quarter-over-quarter growth but a 3.5% decline compared with the same year-ago quarter.

Sedran said he expects lower margins, better revenues from capital markets and tighter expense controls to be the dominant themes of the quarter.

“We forecast lending net interest income to remain relatively flat, driven by ongoing margin pressure and a slowdown in consumer loan growth,” he said.

“While we do not expect those trends to change through our forecast horizon, we look for the impact to at least be tempered by better growth in fee income.”

In a search for revenue growth, some banks have also started to raise service and advisory fees.

But their capital markets divisions, which focus on investment banking and helping clients raise capital on stock markets, have been struggling as confidence in global markets has been battered by economic turmoil. They are expected to remain under pressure.

Some banks are also reining in costs through job cuts, curbing expansion plans and other moves.

Bank of Montreal last week cut as many as 60 jobs in its capital markets division in line with a slowdown in investments. It said the cuts were part of its strategy to keep staffing levels in line with demand in the capital markets environment.

Both Royal Bank and Scotiabank have also pledged to cut growth in operating expenses in 2012.

The big banks reported solid profits in 2011, but some also cut the pay of their CEOs.

Scotiabank’s Rick Waugh earned roughly $10.6 million in 2011, down slightly from $10.66 million in 2010 as he received a higher salary but smaller bonus, while TD’s Ed Clark earned nearly six per cent less in 2011 than a year at $11.3 million.

A better than expected fourth quarter for several of the banks helped achieve significantly improved full-year earnings totalling $24.2 billion, up from $19.5 billion in 2010.

But the largest Canadian banks also reported their capital markets divisions were a drag on their bottom lines during a quarter of extreme market volatility as European debt woes continued to cause market worries.