Bank profits decline due to headwinds

Rising provisions for loan losses, increased spending and financial market headwinds have combined to offset the positive effects of robust loan growth and widening net interest margins, comments Fitch Ratings .

“Capital market revenues have declined [d’une année sur l’autre] in most banks, as the difficult conditions for debt and equity issuances, as well as trading income, offset the increase in corporate lending income,” the agency summarizes.

The Royal Bank and the Bank of Montreal experienced the largest declines in capital markets revenue, says Fitch Ratings, citing their large loan underwriting cuts in the United States.

“Difficult market conditions have also impacted many segments of asset and wealth management, with market depreciation and lower client activity generally leading to stagnant or declining [actifs sous administration] and [actifs sous gestion] as well as related costs,” the rating agency added.

On the positive side, banks continued to benefit from strong loan growth, notes Fitch Ratings, which boosted net interest income and margins.

Average net interest margins rose 9% quarter over quarter, not reflecting the effects of the Bank of Canada’s 100 basis point rate hike in July, the agency says. .

“Commercial loan growth was particularly strong, with an overall increase of 19% [par rapport à l’année précédente]reflecting continued strong business investment coming out of the pandemic,” she noted.

Credit card balances also continued to rise due to consumer spending on leisure and travel.

“While mortgage growth has been resilient, slowing home sales/prices and rising rates will likely lead to weaker growth in coming quarters,” Fitch Ratings said.

While asset quality strengthened during the quarter due to tight labor markets and high liquidity, Fitch Ratings expects this trend to reverse in the short term “as the slowdown in the housing market , inflation and the tightening of monetary policy weigh on the debt capacity of borrowers”.

In anticipation of the anticipated decline in credit quality, banks took $1.6 billion in increased provisions on performing loans, which weighed on earnings, the rating agency found.

“The provisions were largely driven by a negative economic outlook colored by supply chain disruptions, inflation and increased geopolitical risks,” she concludes.

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