By Rita Trichur
After four years of bumper earnings growth, Canada's biggest
banks ended fiscal 2014 warning of gathering headwinds to growth,
as debt-laden consumers make the switch from borrowing to saving
and as banks' costs rise.
Canadian banks sailed relatively unscathed through the credit
crisis and its aftermath, as sound balance sheets allowed them to
continue lending to debt-hungry consumers. Banks, however, warned
this week that lending growth is now drying up and that capital
market revenues are proving a volatile supplement.
Four of the country's so-called Big-Five banks posted
fourth-quarter results this week that missed analyst expectations,
and while the fifth beat forecasts, it was by a narrow margin.
The week's results mark an inauspicious end to a year that began
with a string of blockbuster profits. Canada's banks end their
financial year on October 31.
Up until the fourth quarter, the country's biggest banks beat
the analyst consensus five consecutive quarters, according to
Cormark Securities Inc. The last time average annual growth in
earnings per share growth was negative was in 2010, the brokerage
said.
"Canadian banks have earned their way through a lot predictions
of slowdown, but now we are coming to the realization that
earnings' growth will be muted and with reasonable challenges going
forward," said Todd Johnson, a portfolio manager at BCV Asset
Management Inc. in Winnipeg. "It's not a disaster but it is a
readjustment of expectations" for the sector, he said.
Banks listed headwinds such as low interest rates that provide
thin margins, higher regulatory costs, the fragile global economic
recovery and a domestic economy whose recent record of
outperformance has ended.
Leaving little room for growth in consumer lending, Canadians
remain among the most indebted in the world, with debt to
disposable income at around 163% at the end of the first half of
this year.
Canada's banks have long been considered by rating firms as
among the world's soundest. On Friday, though, Moody's Investors
Service published a report saying the sector faces a negative
outlook for 2015, given high household debt, elevated housing
prices and a government plan to create a so-called bail-in program
to minimize taxpayer's exposure to troubled banks.
Fitch Ratings, meanwhile, issued its own cautious industry
outlook, saying that as earnings slow from consumer lending,
Canadian banks will shift to revenue derived from more-volatile
capital markets and wealth management.
Capital markets were a drag on a number of banks in the fourth
quarter, with Scotiabank, Canadian Imperial Bank of Commerce, Bank
of Montreal and Royal Bank of Canada all revealing slumps in such
operations.
On Friday, the Bank of Nova Scotia became the latest Canadian
bank to strike a cautious tone about more-subdued earnings growth
in 2015, citing challenges such as low-interest rates, ongoing
costs and the relatively sluggish pace of the global economy.
"Looking ahead to 2015, we expect some of the current headwinds to
persist through the first half of the year," said CEO Brian Porter
on a conference call with analysts.
The bank reported a 14% drop in fourth-quarter earnings after
recording charges related to job cuts and branch closures.
The latest round of banking results "round up a disappointing
earnings season," wrote Stefan Nedialkov, an analyst with
Citigroup, in a research note to clients.
Overall, Canada's Big-Five banks collectively had annual profit
of C$31.73 billion in fiscal 2014, up from C$29.14 billion in
2013.
Still, Canadian banks say they have prepared for this moment for
some time. Executives also expect interest rates to rise in the
second half of next year and the pace of global growth to quicken,
offering a pickup for the sector.
The slowdown in commodities markets also means some investors,
when looking at the oil and mining heavy Canadian markets, will
still seek out the countries' banks. "If you are an investor in
these volatile markets, what choice do you have in the Canadian
market. even though the [banking sector's] returns are slowing?"
said John Kinsey, a fund manager at Caldwell Securities Ltd. in
Toronto.
Alistair MacDonald and Judy McKinnon contributed to this
article.
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