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Our Banks are Still Making Money!

4 April 2013

Don’t let them fool you with their talk of a cooling housing market and lower mortgage demand. Our banks are still making money here in Canada, and they’ll most likely continue doing so throughout the next several quarters. A recent report from Fitch says so.

Fitch Ratings is one of the Big Three credit rating agencies, along with Moody’s Investor Service and Standard & Poor’s, that regularly rates financial institutions and assigns them credit ratings. This week, they’ve come out and stated that Canadian banks are still turning profits, and that the forecast looks good.

The Fitch report stated,

“Financial results for the largest six Canadian banks have remained strong in spite of a considerable slowdown in mortgage originations and continuing concerns over household indebtedness in Canada. Although we expect a further cooling of housing market trends to put pressure on mortgage performance for these institutions, offsetting capital markets revenue growth is providing support for the banks to boost capital levels while returning cash to shareholders.

Each of the “Big Six” banks – RBC, TD, Scotia Bank, Bank of Montreal, CIBC, and NBC – all reported earnings growth in the first quarter of fiscal 2013, with strong capital markets revenues and better wealth management unit trends driving much of the improvement.”

But just how qualified are those consumers that are still taking those fewer mortgages the bank is handing out? Fitch says they’re quite qualified, and that’s not hard to believe considering that the federal government has all but forced them to be fully qualified to buy a home.

The report goes on to say,

“Mortgage credit quality trends showed no signs of severe weakness, but mortgage origination was down in the quarter. To a large extent, growth in commercial lending, global banking, and wealth management is offsetting mortgage trends and boosting overall bank performance.”

However, if the banks aren’t careful, and if our economy starts to tank, Fitch says that banks will have to be more careful about continuing to practice those good-quality mortgage loans.

The report continues,

“The more volatile trends in these businesses, in addition to their sensitivity to global economic conditions, could limit earnings power for the Big Six institutions in coming quarters. While conditions in Canada’s labour market have improved somewhat, and tepid economic growth continues, we believe the potential exists for deterioration in mortgage asset quality trends. Credit risks could increase significantly, if a sharp downturn in employment, commodities, or economic growth causes borrowers’ credit quality to decline and, therefore, adversely impacts housing prices.”

The report also points out that this is happening in some Canadian markets, and that banks in these areas will have to be especially careful.

The report finishes off with,

“While a significant pullback in nationwide housing prices similar to the one seen in the United States has not occurred, some signs of a slowdown have appeared in major markets such as Vancouver and Toronto, where rapid development in recent years could make these markets more sensitive to a decline in residential housing prices.”

You can read the full Fitch report provided by Reuters here. And as for those banks? Just remember this report the next time you’re trying to haggle with them for a better mortgage rate, or a cheaper refinance.

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