The big Canadian banks are finishing the year with strong revenue growth, but this isn’t always translating into improved earnings, Fitch Ratings says.
In a report Friday, the rating agency said aggregate revenues were up 4% on a quarter-over-quarter basis for the fiscal fourth quarter (ended Oct. 31) and up 13% on an annual basis for the Big Six banks and Desjardins Group (quarter end Sept. 30).
However, the banks’ “robust top-line momentum … didn’t effectively drive earnings for some banks,” Fitch noted, with adjusted aggregate net income declining by 9% on a quarterly basis for the group.
“Results were primarily driven by improved volumes and margins in Canadian personal and commercial banking,” Fitch said, noting that rate cuts “boosted mortgage and business lending activity.”
Loan growth was up 1% on a quarterly basis and up 6% year over year, Fitch noted, “with Canadian mortgage lending driving a good proportion of that growth.”
However, the declining rates also “led to muted growth for wealth management volumes” and capital markets activity “faced challenges due to uncertainty ahead of the U.S. election in November,” the rating agency said.
The banks also reported higher expenses and credit provisions, which crimped earnings too.
Overall operating expenses were up 2% quarter over quarter, Fitch reported, “as the banks completed many efficiency schemes,” which were announced in the fourth quarter of 2023 and the first quarter of 2024.
“This led the banks to post positive operating leverage, which reached 10% [year-over-year],” Fitch said.
At the same time, loan loss provisions also continued to increase in the quarter, it noted.
“This trend is still driven mostly by a few banks,” Fitch said.
It noted that Royal Bank of Canada increased provisions due to potential worsening macroeconomic conditions and uncertainty around the new U.S. administration’s protectionist policies and Scotiabank’s provisions continue to be driven by its Latin America retail portfolios. Meanwhile, the Bank of Montreal experienced an increase “due to negative migration and elevated losses in its wholesale book.”
Looking ahead, Fitch said it expects the banks to “continue producing single-digit mortgage loan growth in 2025, as lower interest rates and government initiatives improve accessibility for the average Canadian borrower. However, softening economic trends could negatively impact delinquencies, which are trending upwards.”
While deposit growth was “healthy” in the fourth quarter, Fitch said that falling interest rates “will likely intensify deposit competition over the coming few quarters.”
The banks’ capital levels are also strong, it said, with the federal banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), due to make a decision on the banks’ capital buffer requirements on Dec. 17.
“Although the regulator could reduce this level to allow for credit extension in a weaker economy, potential trade headwinds might prompt OSFI to maintain the [buffer] at 3.5%,” Fitch said.