Big bank earnings challenged by expenses: Fitch

Revenues rose but earnings were down for the big banks in the first quarter as charges for job cuts and technology spending piled up, Fitch Ratings says.

While aggregate revenues for the Big Six were up 5% year over year in their fiscal first quarter, adjusted earnings declined by 6%, Fitch reported.

“The large Canadian banks got off to a weak start,” it said, as most of the banks “front loaded their 2024 operational expenditure budgets making many of the investments aimed at enhancing efficiencies during the quarter.”

This upfront spending meant operating leverage declined 3% year over year, Fitch said, although this is expected to turn positive later this year as the banks “capture the benefits of a more streamlined workforce and technology improvements.”

Overall, loan growth was down 2% in the first quarter compared with the same quarter last year “as consumers prioritize spending given the continued high interest rate environment.”

Fitch said that, for most of the big banks, mortgage loan growth was weak too “as banks positioned themselves strategically in a highly competitive environment amidst a softening real estate market.”

Commercial loan growth was relatively strong, it noted, although that’s expected to weaken as consumer spending slows, along with related capital expenditures.

“Credit quality continued to normalize, with more pressure seen in unsecured consumer loans, credit cards and auto lending as the impaired loan ratio reached pre-pandemic levels but remains manageable at an average of 0.6%,” Fitch reported.

Against this backdrop, banks continued to add to their loan loss provisions “in anticipation of some economic pressures,” it said.

Overall, the big banks’ Canadian banking divisions recorded single digit revenue growth, “with muted earnings from wealth management which were more than compensated for by non-Canadian banking and capital markets,” it said.

The adjusted return on assets across the Big Six and Desjardins Group averaged 0.7% in the first quarter, unchanged from the same quarter a year ago.

Additionally, Fitch noted that the banks “eased up on building regulatory capital” in the first quarter, as the Office of the Superintendent of Financial Institutions left the domestic stability buffer unchanged in December, keeping the minimum capital ratio at 11.5%.