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Banks Looking for Alternative Sources of Profit as Residential Mortgages Slow

5 June 2013

It’s no secret that home sales are slowing all over Canada. And along with that, mortgages are starting to dry up at the big banks, too. It’s for this reason that experts believe the trend at banks is going to be starting to focus on commercial lending, capital markets, and other forms of profit that will take over where hot residential lending once was.

“Over the next twelve to eighteen months, I think the theme is going to be a focus on expenses and allocation of capital to some of these businesses, either wealth management, capital markets or insurance that can offset the slowdown,” says Tom Lewandowski, an analyst at Edward Jones.

“We’ve already seen some signs of it, but I think it will become more pronounced over the next three or four quarters.”

This comes on the heels of news that each of the Big Six banks – TD, BMO, RBC, CIBC, National Bank, and Scotiabank – all recorded nearly $7.5 billion in profit during the second quarter of this year. That’s up from $7.1 billion during the same time frame last year.

But four of those banks – TD, BMO, RBC, and Scotiabank – all missed the earnings that Bay Street expected of them. Barclays Capital analyst John Aiken released a research report on Thursday that stated, “making the tally four misses out of six this quarter, ending the streak of largely positive earnings releases for the Canadian banks.”

The problem isn’t just a slowing housing market that’s lessening the amounts of mortgages handed out by the banks. There’s also the fact that the interest on any borrowing products right now is extremely low and has been for the past few years. That means that banks also can’t make as much in interest as they once did. Not to mention the fact that Canadians are becoming much more aware of the amount they’re borrowing. And they’re trying to stem that flow in order to get their household finances in order. Something that policymakers have been very encouraging of.

But while things may look bleak for Canadian banks, most analysts aren’t worried; and believe that the new profit-seeking measures of the banks will pan out for them.

“The Canadian banks are very well run institutions. Given their strong capital levels and their history of strong returns, I’m confident they will continue to find profitable growth opportunities,” says David Tuttle, research analyst at Templeton Global Equity Group. “But in the context of the slowing Canadian retail customer, it may be more difficult going forward.

“As we see the economy pick up, capital markets divisions tend to benefit from that. It’s another element of diversification away from domestic retail banking,” he continues on to say. “Commercial lending tends to offer more favourable profit margins than mortgage lending, so that would be a boost as well.”

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