Large Canadian Banks: Heading into a Challenging 2023 Operating Environment from a Position of Strength
The Canadian banking outlook for 2023 is affected by a challenging operating environment featuring muted economic growth and an increasing likelihood of a recession. Rapid and aggressive aggregate interest rate hikes of 400 basis points during 2022 have, thus far, been unable to significantly tame high inflation while materially increasing borrowing costs. As a result, disposable income is being negatively affected in Canada where high household indebtedness and still-elevated housing prices remain two key vulnerabilities in the Canadian financial system.Key highlights include the following:
-- While macroeconomic conditions are amplifying some key vulnerabilities, DBRS Morningstar expects the overall financial impact to be manageable, as the Big Six are entering 2023 with strong asset quality, ample liquidity buffers, and sound capital levels.
-- Heavily indebted Canadian borrowers are facing increasing pressure as materially higher debt servicing costs and elevated inflation levels continue to eat into disposable income.
-- Credit quality metrics are expected to continue normalizing from unsustainably low levels. Additional interest rate hikes in 2023, a severe recession, and/or larger than expected uptick in unemployment would intensify the credit deterioration.
“The Canadian banking outlook for 2023 is affected by a challenging operating environment featuring muted economic growth and the increasing likelihood of a recession,” said Carl De Souza, Senior Vice President, North American FIG. “Given the more challenging backdrop and higher minimum CET1 regulatory requirement, we expect the Big Six to target CET1 ratios closer to 12%, while curtailing the pace of share buybacks and dividend increases after being very active on both fronts in F2022.”
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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