Experts forecast a deceleration in earnings as economic, regulatory, and policy headwinds swirl
This year has been a strong one for Canadian banks’ earnings, but analysts are expecting less positive momentum over the next few years.
In a note earlier this month, CIBC Capital Markets analyst Robert Sedran estimated growth for the group would reach 11.6% this year, but would moderate to 7% next year and 6.4% in 2020, reported The Financial Post.
“We enter the new fiscal year with what seems like a still-good (albeit less so than last year) operating environment, though one that may begin to show its age,” Serdran said.
A note from Canaccord Genuity echoed the prediction with an estimated deceleration from 11% in 2018 to 6% in 2019 and 5% in 2020. One contributing factor: the waning inertia of the Canadian economy, for which the federal government forecast GDP increases of 2% in 2018 and 2019, followed by 1.6% growth in 2020 — all below the 3% that was observed in 2017.
It’s possible for Canadian banks to outpace GDP growth, noted Barclays Capital analyst John Aiken. But arguably, “a lot of the low-hanging fruit has already been plucked,” he said. And even as they stay aggressive in controlling costs in the following quarters, the returns from those efforts may start to diminish soon.
A recent analytical noted from the Bank of Canada (BoC) also suggested that because of the revised B-20 guideline on residential mortgage underwriting — which apply only to federally regulated lenders — Canadian banks could be losing ground to private lenders. While theBig Six banks saw their share of mortgage originations in the Greater Toronto Area slip from 77.5% to 72.6% in Q2 2018, market share increased for mortgage finance companies, credit unions, and smaller banks.
“Areas with high house prices, such as the Greater Toronto Area (GTA), could therefore see more borrowers obtaining mortgages from private lenders because they might not be able to qualify with other lenders,” the BoC said, though it added that it currently had no data to confirm a similar trend in other provinces.
Rising interest rates have been a boon for banks’ margins in the shorter term, but there’s a real possibility that it would begin to weigh on consumer borrowing and spending. Another challenge for the big banks’ profits, reported Reuters, comes from the flattening yield curve, which diminishes their capability to borrow at a low rate and charge customers a higher one.
Higher funding costs are also on the horizon as a price war develops in the retail-deposit business. With the impact of five BoC rate hikes since last summer on their minds, savers have started demanding higher interest, according to Eight Capital banking analyst Steve Theriault. With that, rates offered on savings accounts have approximately doubled over the past three years.
“It’s the first time you’re seeing heated competition since the financial crisis,”Theriault told Reuters.
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