Amidst a backdrop of economic uncertainty and high household debt levels, the big Canadian banks are poised to see modest earnings growth in the coming years, according to a recent report by Fitch Ratings. Despite challenges such as tight monetary policy and housing affordability issues impacting loan growth and net interest income, the banks are expected to weather the storm and continue to perform well.
Factors Influencing Earnings Growth
Fitch highlighted several key factors that will influence the earnings growth of the big banks in the near future. The report mentioned that while interest rates are decreasing, the impact on economic activity may take some time to materialize due to the lag in monetary policy. Household spending is expected to remain weak, with Canadian households facing a debt servicing burden that exceeds 15% of gross disposable income and is likely to increase further. Fitch forecasts that the Bank of Canada will cut rates to 2.5% by the end of 2026, indicating a prolonged period of low interest rates.
In the longer term, the big banks are expected to benefit from strong immigration, which will support growth in retail banking, particularly in residential mortgages and unsecured lending. Additionally, the banks’ wealth management businesses are likely to see a boost from Canada’s aging population and increasing demand for wealth and estate planning products. Lower interest rates are also expected to stimulate capital markets activity, further contributing to earnings growth.
Earnings Outlook for 2024 and 2025
Fitch projects “moderate” earnings growth for the big banks in 2024 and 2025. While cost containment remains a challenge for the banks, initiatives aimed at cutting costs are expected to help mitigate this issue. Rising provisions and economic uncertainty pose challenges, but the banks are taking steps to cushion reserves and manage risks effectively. Among the big banks, Royal Bank is expected to outperform its peers due to its leading market positions and strong distribution network.
The asset quality of the banks remains robust, with non-performing loans showing a slight increase in recent quarters. Fitch does not anticipate significant deterioration in asset quality beyond benchmark levels for any of the banks in 2024 or 2025. Commercial lending to sectors such as oil and gas and U.S. office commercial real estate is deemed manageable, with non-performing loans in these areas averaging less than 1%-2% of gross loans for each asset class.
Capital Strength and Resilience
Fitch also highlighted the strong capital ratios of the big banks, attributing this strength to their conservative risk profiles and diversified business models. The banks have maintained stable capital positions, with Fitch projecting a slight increase in their capital positions in 2024 and 2025. Internal capital generation, manageable credit losses, and moderate growth in risk-weighted assets are expected to contribute to this trend.
The banks’ low loan impairments and solid reserves are cited as factors supporting their capital and loss absorption capabilities. Fitch noted that the banks’ capital positions are further bolstered by their relatively low loan impairments and strong reserves, indicating a solid foundation for navigating potential challenges in the future.
In conclusion, Fitch’s forecast for the big Canadian banks points to a period of moderate earnings growth in the next couple of years. Despite facing headwinds such as tight monetary policy and high household debt levels, the banks are well-positioned to navigate these challenges and continue to deliver strong performance. With robust asset quality, strong capital ratios, and a focus on cost containment, the big banks are expected to maintain their resilience and drive growth in the face of economic uncertainty.
