Big Six see mixed results: Fitch

Amid flat revenues, the Big Six banks reported mixed results for their fiscal fourth quarters, Fitch Ratings reports.

The rating agency said the big banks, along with Desjardins Group, reported aggregate revenues that were down 1% year over year.

“Sequentially, volumes were higher in the banks’ Canadian segments, which were offset by a more challenged environment for U.S. operations,” Fitch said.

“Although capital markets businesses have improved in general, wealth management continues to experience low transaction revenue,” it added.

Aggregate earnings were down by 6% in the fourth quarter, Fitch reported, as several banks took charges to account for workforce reductions, along with real estate and service contract cuts.

“Operating expenses were up 5% [quarter over quarter] to an aggregate total of $34.1 billion as certain banks announced reductions in their staffing levels,” Fitch said.

Some of the banks expect this trend to continue in the first half of 2024, it noted, while others are anticipating increased efficiencies of 1% to 2% next year.

Amid the higher expenses, the banks continued to see negative operating leverage in the fourth quarter, with median operating leverage of -4.1% on a quarter-over-quarter basis and -9.3% year over year.

Looking ahead, the rating agency said it expects earnings to stabilize in 2024 “as banks begin to see the benefit of these efficiencies along with improving asset yields due to loan portfolio rebalancing.”

Given the gloomier economic outlook for the coming year, the big banks increased credit loss provisions on performing loans for their Canadian operations, Fitch said. Provisions for the U.S. were focused on impaired loans “due to some emerging weakness in consumer health and deterioration in certain commercial real estate exposures,” it said.

Gross impaired loans as a share of total loans came in at 54 basis points, up from 47 bps last quarter, the report noted.

“Banks continue to highlight office commercial real estate as a sector of special focus although it represents approximately 1% or less of total loans,” it said.

“In general, banks have begun to see some weakness in their consumer lending portfolios, a trend which Fitch expects to continue as individuals feel the pressure from a high interest rate environment and a softer economic outlook,” it added.

The banks also continued to build up their capital positions, with most banks targeting common equity Tier 1 ratios of between 12.0% and 13.0%.

In terms of funding, total deposits increased by 2% in the latest quarter, “mainly due to strong deposit numbers in Canada [. . .] despite some pressures across the banks’ U.S. subsidiaries, in line with U.S. industry trends,” the report said