Canada’s biggest banks are pushing more loans out the door at smaller margins these days, trying to boost domestic lending as their securities businesses are held back by upheaval in financial markets.
Bank of Nova Scotia and Royal Bank of Canada demonstrated that trend Friday, reporting higher loan volumes in the fourth quarter and depressed profits in their capital markets operations.
Just as Toronto-Dominion Bank and Canadian Imperial Bank of Commerce reported on Thursday, Scotiabank said the gap between what it pays to borrow and what it earns on loans shrank. Royal Bank managed a victory simply by holding its interest margins almost unchanged.
While RBC and Scotiabank each posted profit growth that beat analysts’ expectations, their capital markets divisions were a drag on the bottom line. Economic upheaval in Europe has led to market uncertainty, causing a steep drop in fixed-income trading revenue.
“When there is more clarity around European sovereign debt issues and the state of the global economy, we believe improved market conditions will result in a more stable trading environment,” RBC chief executive officer Gord Nixon told analysts on a conference call.
RBC reported quarterly profit rose 43 per cent to $1.6-billion in the fourth quarter, while Scotia said income climbed 11 per cent to $1.24-billion.
Both banks sought to comfort investors worried that financial institutions might face significant losses from the turmoil in Europe. Scotia said its exposures around the world are “very limited in the areas of concern,” while RBC laid out in detail its exposures to individual European countries.
RBC said it had a “minimal” $1.4-billion net exposure to the most worrisome countries: Greece, Ireland, Spain, Italy and Portugal. Of the bank’s total $43.3-billion exposure to Europe, about 86 per cent was to counterparties in AAA-rated countries. That led analyst Peter Routledge of National Bank Financial to say RBC “has maintained its credit risk discipline in Europe,” but adding that investors might still punish the company with a lower valuation because of its assets in the region.
While much of the focus is on what’s happening abroad, the banks are fighting hard to make money in Canada. That’s leading to pressure on margins as they compete for business.
In a trend seen across the sector this quarter, Scotiabank is making less on every dollar it lends. Canadian banks are trying to boost loan volumes to make up for shrinking margins, but with consumers increasingly tapped out, that can’t continue indefinitely.
Net interest margins are the difference between what the banks make on loans and what they pay out on deposits. Scotiabank’s net interest margin fell to 1.63 per cent in the fourth quarter, from 1.67 per cent in the previous quarter. The squeeze was similar to the pressure seen in fourth-quarter numbers issued this week by Toronto-Dominion Bank and Canadian Imperial Bank of Commerce.
RBC appeared to buck the trend slightly by reporting stable margins. It reported a net interest margin of 2.73 per cent in the fourth-quarter, essentially flat compared with the 2.74 per cent the bank reported in the third quarter.
“Similar to TD and CIBC, Scotia incurred margin compression in its domestic retail bank,” Barclays Capital analyst John Aiken said in a note to clients on Friday. “It makes Royal’s minimal margin compression stand out even more.”
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