Strong capital markets in the first quarter boosted revenues and earnings for the Big Six banks and helped offset the impact of declining interest rates and rising loan-loss provisions, says Fitch Ratings.
In a report published Friday, the rating agency said aggregate revenues for the Big Six and Desjardins Group rose by 5% in the fiscal first quarter ended Jan. 31, and adjusted net income was up 18% in aggregate (despite a dip in reported earnings).
“Many of the banks saw their results buoyed by strong capital markets activity,” Fitch said, noting that capital markets revenue was up 22% in the quarter, “with some banks posting record growth in trading revenue.”
The banks’ wealth management operations also saw strong volume, but revenues were only up 3% on aggregate, “due to lower margins,” the rating agency said.
Similarly, net interest margins declined in the quarter, following rate cuts by both the Bank of Canada and the U.S. Federal Reserve Board — Fitch said the median reported net interest margin declined to 1.62% in the quarter, from 1.70% in the previous quarter.
Weaker economic conditions also produced “subdued” activity in the personal and commercial banking segments, it noted.
“Loan growth improved by almost 2% during the quarter spurred on by rate cuts, with Canadian mortgage lending driving a good proportion of that growth,” Fitch said, adding that it expects the banks to continue recording single-digit mortgage loan growth in 2025, “as lower interest rates and government initiatives improve accessibility for the average Canadian borrower.”
At the same time, loan-loss provisions “continue to trend upward,” it reported, with the banks’ provisions ticking up to 0.48% of gross loans in the first quarter from 0.46% in the previous quarter — provisions are also up from 0.41% in the same quarter a year ago.
The rise in credit provisions comes as delinquencies continue to trend higher, amid weaker economic growth.
“The banks reported seeing most of the deterioration in their unsecured retail portfolios, in addition to some impairments in their commercial books, which would lead to lumpiness in the impaired loans ratio over the next few quarters as they work out these loans,” Fitch said.
It reported that the median impaired loan ratio rose to 0.81% in the latest quarter, up from 0.69% in the previous quarter, and 0.65% in the first quarter of fiscal 2024.
Finally, the rating agency said that the banks’ capital positions “remain strong,” with the median common equity Tier 1 capital ratio at 13.6% by the end of the quarter.
“Most banks have reinstated their share buyback programs while some are looking at opportunities to further deploy capital,” it noted.
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