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Competition for new commercial loans among Canadian banks is heating up.

Vincent Yu/AP

Competition for new commercial loans among Canadian banks is eating into profits they make on business lending.

HSBC Bank Canada, the country's seventh-largest bank, said in an earnings report this week that second-quarter pre-tax profit at its commercial banking unit tumbled 53 per cent from the same period in 2012. The drop provides more evidence of the damage caused by lenders trying to undercut each other on pricing.

"Clearly there's more competition," for commercial loans, chief executive officer Paulo Maia said in an interview. "There's more liquidity out there, so that has put a bit of pressure on spreads."

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This spread, also referred to as net interest margin, or what the bank makes by lending at a higher rate than it pays depositors, is under siege across the country. HSBC Bank Canada does not break out the profit it makes on each loan.

Yet HSBC also had other problems to resolve in its commercial-lending unit. Citing problems with loans made to the energy and real estate sectors, the bank raised its total loan impairment charges to $84-million, a 50-per-cent jump compared with their level at the end of the first fiscal quarter. The commercial banking arm also reduced the fair value of an investment property held for sale, adding another non-cash hit to the bottom line.

Downplaying these charges, Mr. Maia stressed they likely won't be recurring items, meaning the bank's entire loan portfolio isn't likely to see substantially more losses. "We're not seeing anything systemic at the moment," he said.

Still, analyst John Aiken at Barclays Capital said investors should watch these provisions at all the Canadian banks in the coming quarters. "With industry provisions flat to up in five of the past seven quarters, we maintain that credit has reached an inflection point for the Canadian banks, and anticipate further weakening in provisions for credit losses, on both [an] absolute and ratio basis," he wrote in a note to clients.

Mr. Maia said the troubled investment property was acquired by the bank years ago and is located in a non-urban area. Although urban real estate has been profitable, he said, the location of this particular property has hurt its value. He declined to provide further details about the bank's energy or real-estate sector loans.

Mr. Maia also said that HSBC remains committed to lending to the energy sector, despite the provision. HSBC has long targeted clients who are large multinational corporations, and many of these operate in industries such as energy and infrastructure.

While the lower loan margins and higher credit provisions dominated HSBC's earnings, the bank's deposit growth stood out as a bright spot during the second quarter. (HSBC's fiscal quarters always end one month before the Big Six banks'.) The bank now has $26.8-billion of liquid assets, up from $24.3-billion at the end of 2012.

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"With the level of overall household indebtedness [in Canada], I think people started to save more," Mr. Maia said.

Though retail banking made up just $18-million of the bank's $182-million profit before tax last quarter, a bigger deposit base gives the bank more cash to lend out to companies who need to borrow it.

In total, HSBC made $130-million last quarter, down 35 per cent from the same period in 2012.

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