More Subdued Growth on tap for Canada’s Banks

According to the Conference Board of Canada’s first outlook for the Canadian banking industry, there will be only 2.4% of GDP growth.

GDP growth in Canada’s banking industry will be limited to 2.4 per cent this year amid a slowdown in consumer and business credit growth, according to The Conference Board of Canada’s first outlook for the Canadian banking services industry. Still, the industry is expected to perform better than the overall Canadian economy and profit margins will remain healthy over the forecast period.

“Despite a sluggish Canadian economy, the banking industry managed a strong performance in 2016 largely due to the robust growth in the housing sector and equity markets,” said Kristelle Audet, Senior Economist, The Conference Board of Canada. “However, with growth in consumer and business credit expected to weaken going forward, the industry will expand at a slower rate than what we have seen in recent years, although it will still outperform the overall Canadian economy”.

Highlights

• Canada’s banking services industry’s growth will be limited to 2.4 per cent in 2017 due to weaker growth in both consumer and business credit.
• With high household indebtedness and low interest rates limiting growth in the consumer credit segment, banks have been keen to tap into business lending in recent years. However, this segment is now also running out of steam.
• Despite slower growth, the industry will keep its costs under control, allowing pre-tax profits to surpass $80 billion in 2017.

The robust performance of the industry in recent years was largely driven by non-interest income sources due to historically low interest rates. Interest income, which accounts for over 40 per cent of the industry’s revenues, has remained essentially flat in recent years. In order to generate revenue growth, the industry had to look for other sources, including insurance and investment management services, as well as banking fees.

The banking industry has also been keen to tap into the business loan segment in recent years. Chartered bank loans issued to the private sector have posted their longest expansion on record—24 consecutive quarters of growth since the 2009 recession. However, the double-digit increases seen through 2016 will not be sustained moving forward, with a slowdown in private sector lending growth expected this year.

Also, with the housing market forecast to cool as a result of new taxes and tightened mortgage-lending rules combined with interest rates likely to rise at modest pace starting in 2018, growth in mortgage and non-mortgage debt will continue to ease. In fact, this year, for the first time in 25 years, growth in disposable income should outpace growth in consumer debt.

Growth in the industry will thus be limited by more moderate growth in both consumer and business credit. Given the more challenging business environment, the industry is undertaking significant efforts to keep costs growth under control, which will allow it to maintain a healthy profit margin throughout the forecast. However, there are still risks to this outlook. A correction in either the housing or equity markets would have a significant impact on the industry’s performance.

Despite historically low interest rates, the industry’s profit margin has improved significantly in recent years and is expected to average around 31 per cent over the next five years. Meanwhile, pre-tax profits will continue to climb, reaching over $80 billion this year.