* Loan growth slowing, margins narrower
* Housing boom starting to show cracks
* High consumer debt levels prompting caution
* Canadian banks pricer than rebounding U.S. lenders
By Cameron French
TORONTO, June 17 For Canadian banks, slowing
domestic loan growth and narrowing lending margins threaten the
double-digit profit gains that have become routine in recent
quarters, adding to the generalized pressure being exerted on
the sector by Europe's debt crisis.
The slowdown has arrived at a particularly inopportune time
for the Canadian banks as the euro crisis threatens to roil bank
stocks around the globe. Rather than flocking to Canada's
conservative banking sector - often described as the world's
soundest - some equity investors may instead gravitate to U.S.
lenders, which may have a higher upside when markets eventually
"What we're seeing here is the early indications of the
domestic consumer lending slowdown that everyone has been
watching for," said Barclays Capital analyst John Aiken,
pointing to earnings figures for the most recent quarter.
While few are predicting a marked drop in profits for the
sector, the prospect of flattening growth is a significant shift
for a bank industry that has long enjoyed robust loan expansion
at home, allowing it to churn out billions in quarterly profits.
"Canadian loan growth simply will not be the tailwind for
the core domestic banking business as it has for the Big Six
(banks) in the last decade," said Todd Johnson, a portfolio
manager at BCV Asset Management in Winnipeg, Manitoba.
CORE LOAN GROWTH
Canada's banks emerged from the 2008 financial crisis
without having to take U.S.-style bailouts, and have taken
advantage of the decline of several U.S. and European rivals,
buying up bargain-priced assets and poaching investment bankers.
But their domestic consumer-banking franchises have long
been the core of their profit engines.
Protected from foreign takeovers by law, the top six
Canadian banks dominate the domestic loan market, generating
rich profits to fund acquisitions, thanks to the country's
steady economy and decade-long housing market boom.
That boom is now showing signs of petering out with
year-over-year price gains slowing, while Canadians appear to be
starting to heed government warnings about debt levels that are
at a record high as a multiple of average income.
Retail banking revenue fell on a quarterly basis in the
second quarter at every bank but one.
Lines of credit and credit card balances at some banks are
already declining, while personal loans and mortgages are
showing increasingly anemic growth, up only slightly from the
Margins on the loans are being pinched by low interest
rates, which could continue to slide as loans entered into when
rates were higher are renewed at lower rates.
Meanwhile, funding costs could rise following a government
move to restrict the issue of covered bonds, which the banks use
to fund mortgages at low rates.
"Without the benefit of the cheaper cost of funding out
there, it seems like the market pressure's going to come back
and really show up more for all the banks in the second half of
the year," said Brian Klock, a San Francisco-based analyst at
Keefe, Bruyette & Woods.
With the domestic picture cloudy, investors say the banks
with substantial foreign operations - Toronto-Dominion Bank
and Bank of Nova Scotia, in particular - have
the brightest growth outlooks.
Despite the overall growth concerns, investors and analysts
remain generally positive on the sector, although some wonder if
the murky outlook could eat into some share price support.
While Canadian investors, who largely hold the banks in
pensions or retirement funds, are unlikely to leave in droves,
foreign investors who have embraced the banks as a safe-haven
investment over the last four years may be tempted to shift to
U.S. financials, market players say.
"If you believe the U.S. economy is stabilizing and growing
and if you believe the housing market and employment is growing,
then it's probably better to be in the U.S. financials," said
Paul Gardner, a portfolio manager at Avenue Investment
The six Canadian banks are trading at price-to-book value
ratio of around 1.8, a level that some argue may be unwarranted
by the growth outlook, but one that is nonetheless far above the
U.S. bank sector, which is trading well below book value.
Recent trading performance shows that the U.S. stocks, while
more volatile than their Canadian counterparts, may already be
Among top U.S. lenders, the shares of Bank of America
and JP Morgan are up about 40 percent and 5
percent respectively in 2012, despite selling off sharply since
March amid rising euro zone tensions. Wells Fargo is up
16 percent in 2012.
Canadian banks Royal Bank of Canada, TD, and Bank of
Nova Scotia have had a milder selloff since March, but have a
more modest performance year-to-date. RBC is down 2 percent,
while TD and Scotiabank have risen 3 percent.
"It doesn't mean that the banks aren't a good investment
long term, just that right now there isn't a lot of strong
earnings coming through," said Pat McHugh, a senior portfolio
manager at Manulife Asset Management.