Large Canadian Banks: Cautious Optimism Heading into 2022
The Canadian banking outlook for 2022 remains cautiously optimistic despite persistent uncertainties related to the Coronavirus Disease (COVID-19) pandemic, inflation and related supply chain bottlenecks, rising interest rates, and wage growth pressures. Strong credit quality, an improved macroeconomic outlook, and government support programs helped propel the Big Six to strong performances and improved year-over-year returns on equity in F2021. Despite net interest margin pressure from low interest rates, the banks' highly diversified franchises allowed them to capitalize on elevated trading and client activity in their capital markets businesses in the first half of F2021. DBRS Morningstar does not expect the level of provision for credit losses (PCL) reversals or heightened capital markets activity recorded in the first half of F2021 to repeat in 2022.Key highlights include:
-- Drivers of profitability are expected to shift heading into 2022, from PCL reversals and elevated capital markets activity to higher net interest income from increases in interest rates and higher margin nonresidential mortgage lending volumes.
-- Modest deterioration in PCL and asset quality metrics from unsustainably low levels is expected as a result of higher loan volumes and potential pandemic-related impacts. However, the magnitude and pace of interest rate increases may have a larger impact on credit quality, particularly if the tightening cycle leads the Canadian economy into recession.
-- Elevated capital levels heading into 2022 are expected to translate into share buybacks, acquisitions, or a combination of the two.
“An increasing interest rate environment in both Canada and the United States should bolster net interest income and earnings. This will help offset modest asset quality deterioration from unsustainably low levels as government support tapers off. Supply-demand imbalances continue to fuel house price appreciation. After moderating during 2020, consumer household debt levels have been on an upward trend and there has been a surge into variable rate mortgages since April 2021, as the spread between fixed-rate and variable-rate mortgages widened. Going into 2022, DBRS Morningstar expects the banks to effectively deploy capital in order move their CET1 ratios closer to the 11% to 12% range,” said Carl De Souza, Senior Vice President, North American FIG.
Bank of Montreal is a financial services organization. Co. provides a range of retail banking, wealth management and investment banking products and services. Co. serves its clients through three operating groups: Personal and Commercial Banking, which provides financial services to personal and commercial customers; Private Client Group, which provides wealth management products and services to individuals and select institutional segments; and BMO Capital Markets, which provides clients financial and capital markets services to corporate, institutional and government clients.
Scotiabank is a financial services provider in North America, Latin America, the Caribbean and Central America, and parts of Asia. Through its three operating segments: Canadian Banking, International Banking, and Global Banking and Markets, Co. provides a range of advice, products and services, including personal and commercial banking, wealth management and private banking, corporate and investment banking, and capital markets. As of Oct 31 2017, Co. had total assets of C$915,273 million and total deposits of C$625,367 million.
Canadian Imperial Bank of Commerce is a financial institution. Through its three business units, Co. provides a range of financial products and services to individual, small business, commercial, corporate and institutional clients in Canada and around the world. Co.'s Retail and Business Banking business unit provides financial advice, products and services. Co.'s Wealth Management business unit provides integrated advice and investment solutions. Co.'s Capital Markets business unit provides integrated credit and global markets products, investment banking advisory services and research. As of Oct 31 2017, Co. had total assets of C$565.26 billion and total deposits of C$439.71 billion.
National Bank of Canada is a provider of financial services that include banking and investment solutions for individuals and businesses as well as securities brokerage, insurance and wealth management services. Co. operates in three business segments: Personal and Commercial, which encompasses the banking, financing, and investing services; Wealth Management, which comprises investment solutions, trust services, banking services, lending services and other wealth management solutions; and Financial Markets, which encompasses banking services, investment banking services and financial solutions. At Oct 31 2017, Co. had total assets of C$245.83 billion and total deposits of C$156.67 billion.
Royal Bank of Canada is a financial services company that provides personal and commercial banking, wealth management services, insurance, investor services and capital markets products and services. Co. serves personal, business, public sector and institutional clients through offices in Canada, the U.S. and 37 other countries. Co. is organized into five segments: Personal and Commercial Banking, which is comprised of Co.'s personal and business banking operations, and its auto financing businesses; Wealth Management, Insurance; Investor and Treasury Services; and Capital Markets. As of Oct 31 2017, Co. had total assets of C$1.21 trillion and total deposits of C$789.64 billion.
Toronto Dominion Bank provides financial services. Co.'s segments comprised of: Canadian Retail, which include Canadian personal and commercial banking businesses, Canadian credit cards, TD Auto Finance Canada and Canadian wealth and insurance businesses; US Retail, which includes the US personal and commercial banking businesses, US credit cards, TD Auto Finance US, US wealth business and the Bank's investment its subsidiary, TD Ameritrade Holding Corporation; and Wholesale Banking, which provides a range of capital markets, investment banking, and corporate banking products and services. As of Oct 31 2017, Co. had total assets of C$1.28 trillion and total deposits of C$832.82 billion.
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