As the country's major banks get ready to report earnings this week, investors are taking a closer look at two areas of the balance sheet - commercial loans and consumer lending. Each will have something to say about what kind of a quarter it was in banking, but the real value of the data will be the statement it makes about the Canadian economy in the year ahead.
There is a growing consensus among economists and bank executives that an economic recovery will be driven by business spending - and borrowing - rather than the dwindling contributions of the cash-strapped consumer, who has more debt and is therefore more constrained than ever before.
Canadian companies, on the other hand, have emerged from the economic downturn in reasonably good financial shape. Most cut costs and paid down debt during the slowdown in order to shore up their balance sheet. Evidence of this has already been seen in the rate of business bankruptcies in Canada, which have fallen to an all time low - with just 3.4 bankruptcies per 1,000 businesses in 2010 -in the aftermath of the worst global recession in more than a generation.
To grow and compete, companies will now have to start spending. And much of corporate Canada is in a prime position to borrow in order to fuel that shift, buying machinery, technology and expanding. Large companies will be able go to the market with debt and equity offerings, but for the vast majority of small and mid-size firms, finding capital means a trip to the bank.
Beginning this quarter, and likely for the rest of the year, what bank earnings say about commercial loan growth and consumer borrowing will indicate whether businesses are indeed leading the charge in a rebounding economy, and whether consumers are able to take part themselves or have been relegated to the sidelines.
This, in turn, will impact the earnings at each bank.
"There is a belief here that this is going to be a business-led recovery, particularly in the U.S., but perhaps also in Canada, so are we going to see commercial loan growth accelerate and take over for a slowdown on the consumer [side]" said Mario Mendonca, an analyst with Canaccord Genuity Corp.
He believes that trend - the passing of the baton, so to speak, from the consumer to the corporation - will be a key theme that influences bank stocks in 2011.
Banks with more of their loan book allocated to commercial lending in North America, such as Bank of Montreal (at 29 per cent), National Bank of Canada (24 per cent) and Toronto-Dominion Bank (at about 20 per cent), could gain more from business-led recovery than banks who lean toward consumer lending, such as Canadian Imperial Bank of Commerce.
BMO and National Bank have already signalled to investors that they expect to see commercial loan growth picking up.
At the end of the last quarter, BMO chief executive officer Bill Downe said he expected a business-led recovery. That came after the bank reported a 6.9-per-cent increase in the amount of money it lent to businesses, compared to a year earlier.
"With a strong Canadian dollar, Canadian companies, both in the service and manufacturing sectors, are going to have to get more competitive globally, so I think they're going to have to invest," Mr. Downe said in December.
That comes as a variety of officials, from Bank of Canada Governor Mark Carney to the Prime Minister, have stated publicly they are concerned about the debt levels taken on by Canadian households. So for the banks, it's a necessary shift.
However, a slowdown in consumer lending leaves a big hole to fill that isn't easy to make up on the commercial lending side of the business, according to Rob Sedran, an analyst with Canadian Imperial Bank of Commerce.
"The market is expecting personal loan growth to slow, and I think you need an accelerating recovery in order to see business lending pick up to the point where it can make up for that," Mr. Sedran said.
"Even if you do see an uptick in business lending, I think it's still a bit of a challenge given the makeup of the loan book, and the majority of the loans are personal and mortgage lending."
There could be one wild card in the consumer lending side. The government's efforts to rein in household borrowing, by eliminating its support for 35-year mortgages and reducing the amount that can be borrowed against a home, will take effect this spring.
There is an outside chance a blip in the banks' consumer lending numbers could emerge in the first half of this year, caused by people rushing to take out a 35-year mortgage or borrow against their home before the new rules take effect. That would stop the declines in consumer lending the banks are seeing, but only temporarily.
"Something that everybody is really sensitive to is did we see a slowdown in domestic consumer lending - mortgages and personal loans" in the last quarter, Mr. Mendonca said. "But is it possible that rather than a decline this quarter, we saw an acceleration as people were trying to get their mortgages in before the change in rules.
"Or did we actually see people being reasonable and maybe careful and prudent again and take down their consumer borrowing a little bit?"