There’s good news and bad news surrounding the banking sector today. The good news is that consumers are no longer gobbling up home equity loans and home equity lines of credit like they’re the last ones ever to be offered. The bad news is that it means that the banks have fewer profits. At least, that’s what they showed in the second quarter.
The Big Six banks are not actually suffering all that much, as they do continue to make profits. Large, large profits. But, there’s no doubt that as home borrowing begins to narrow, so do the profit margins of those banks. And that will make it harder for the banks when they try to persuade investors that the banks are a sound place to put their money.
Peter Routledge, National Bank Financial analyst says, “The Big Six Canadian banks will suffer from the impending completion of a near 15-year expansion in Canadian household leverage,” he says. Mr. Routledge also points to the Canadian housing market, saying that the problem is not in overvaluation of homes, but in the fact that consumers and homeowners are simply taking on too much debt.
“The risk to the Canadian economy lies not in the prices of residential housing but in the level of household debt relative to income,” Mr. Routledge continues. “Households in this segment have little room in monthly income to withstand [shocks] such as loss of employment, higher mortgage interest rates, or other unanticipated and continuing expenses.”
So how are banks going to recoup their losses? It will probably be largely through commercial loans. These types of loans have dropped off considerably within the past few years but they could now be making a resurgence as banks continue to look for ways to make up their profits.
Another strategy that some of the banks are going to use to get back some of their profits is by expansion into foreign countries. TD and BMO are two banks that will be headed to the United States, while Scotiabank will be headed to South America and Asia to expand their horizons, and their profits.
But, what about those banks that focus mostly on Canadian banking, such as CIBC and National Bank. Canaccord Genuity analyst Mario Mendonca said in a letter to his clients, “CIBC and to a lesser extent National are the most exposed to a slowdown in consumer loan growth.”
