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RBC Bank on Bay Street, Toronto. August 2, 2013.Gloria Nieto/The Globe and Mail

As Canadian banks roll out their fiscal first quarter results, starting with Bank of Montreal on Tuesday morning, credit rating agency Standard & Poor's has released its thoughts on the sort of environment the banks face given high consumer debt levels and the uncertain economy.

S&P maintained a "stable" outlook for the Big Five, reinforcing what everyone knows about the sector: Profitability is strong and loan losses are low.

BMO helped illustrate the point. As Tim Kiladze reports, the bank delivered earnings of $1.1-billion or $1.58 a share in the quarter, up 5 per cent year over year. Adjusted earnings topped analysts' expectations and loan loss provisions declined to $99-million from $178-million last year.

But it's not all clear skies. S&P noted that the banks face a formidable challenge: They must find growth opportunities but also preserve the quality of their assets. That's no easy feat given the backdrop. Consumer debt levels relative to incomes are at a record high, even as the pace of debt growth slows. That's not a huge problem right now, but could hurt the banks if Canada slips into recession.

S&P explains: "Our stable outlooks across Canada's banking sector reflect our view that the current ratings can accommodate dips in performance arising from our current expectations around competitive margin pressures, slower loan growth, regulatory changes, and potential erosion in asset quality owing to high consumer debt. And while consumer leverage remains a credit concern, we expect the buildup of debt will continue to moderate. Furthermore, we do not believe that elevated house prices and consumer indebtedness are themselves sufficient to trigger a downturn in the Canadian economy."

An economic downturn, though, is going to hurt as indebted consumers retrench, making any investment in Canadian banks a clear bet on the near-term direction of the economy. Severity of any downturn is key: "If there is no extreme downturn, we believe that the current earnings and capital positions of Canadian banks can readily absorb a moderate increase in losses as the credit cycle proceeds," S&P said.