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A Drop in Consumer Lending has Banks Clamping Down, says Analyst

28 February 2013

It seems that Canadians have been paying attention to all the warnings given by Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney – consumer debt has finally slowed. But while that might be good news for some of Canada’s top officials, not to mention its biggest borrowers, it’s nothing but bad news for the banks. This slowdown in borrowing has also led to slowdown in profits. And to deal with it, banks are going to have to find other areas where they can clamp down their spending.

Results for the past few months show that consumer borrowing dropped 0.6 per cent in both November and December, brought on by changes to mortgage rules last year and a new awareness about borrowing on the part of consumers. While this decline would be worrisome at any other time, it’s especially worrisome for banks that a decline was seen during the holiday months; a time when spending usually reaches its high for the overall year. Instead, Canada’s biggest banks mostly reported a drop in earnings for their first quarter.

In a note to clients about the drop in earnings, Sumit Malhotra, analyst witih Macquarie Capital Markets in Montreal, said,

“Lending to the Canadian consumer has been the safest and most consistent revenue stream for the banks over an extended period of time, and it is now very reasonable to expect that this growth engine is going to be much less robust for a foreseeable future. Does this mean they can no longer grow? No, we do not think this is the case.”

Mr. Malhotra believes that there are still a number of avenues banks can take to off-set the loss in consumer spending. Those include leaning on other profit-generating resources such as capital markets, corporate lending, and wealth management.

This may not mean much to the average consumer who’s most likely fed up with the amount of fees and costs their bank charges them. But, it does mean a lot to investors, and Mr. Malhotra believes that “offset is now the most important word in Canadian banking.”

Even more importantly, investors are going to have to start researching the banks they use and invest in a little more carefully, and ensuring that they’re off-setting in the most effective areas. And most banks are already looking for ways to do it. CIBC has already done its part, as Rob Sedran, analyst at CIBC World Markets, says,

“Margins remain under pressure from a combination of competition and low rates while asset growth continues to slow in the face of elevated consumer debt and an economy that is showing some signs of weakness.”

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