Are Canada’s big banks doomed?

Any way you size up Canada’s Big Six banks, they have grown a lot huger over the past decade. Their combined annual revenues and stock market capitalization roughly doubled, despite the financial crisis, and their profits surged by 150%. But the future looks far less certain.

Maxed out

Residential bank loans in Canada have climbed by an average of 9% a year since 2005, as borrowers have taken advantage of rock-bottom interest rates and a hot housing market to load up on mortgages, personal loans and credit card debt. But as economic forecasts darken, consumers are recognizing that they are more or less tapped out. Annual growth in the banks’ mortgage loan portfolios has slowed to about 5% and home equity lines of credit have gone flat.

Oil crunch

Lending money to energy companies in Alberta was so easy when crude oil traded for more than $100 (U.S.) a barrel. After the price sank below $40 last year, it became a headache. The banks are starting to book provisions against bad oil and gas loans. Sure, energy loans are now just 2.2% of the Big Six’s total lending, but they add up to $50 billion, and some banks are more exposed than others.

Rate squeeze

Banks still generate a lot of income by borrowing money at low rates and lending it out at higher rates. But as the Bank of Canada has slashed its benchmark rate to near zero, that spread has narrowed. Take Royal Bank of Canada: Its net interest margin for Canadian personal and commercial banking shrank from 3.3% in 2005 to just 2.7% last year. Higher Bank of Canada rates would create some headroom, but Bank Governor Stephen Poloz appears reluctant to raise them any time soon.

Fintech flood

Thousands of start-ups worldwide, along with tech heavyweights like Apple, are developing financial services apps that make payments from smartphones a snap, spew data and link borrowers to lenders. Problem No. 1 for the banks: Doing nothing means losing market share to the upstarts. Problem No. 2: Doing something means they’ll have to ramp up their own technology and divert resources from traditional banking. The result: big spending increases and restructuring costs associated with layoffs.