Economic headwinds threaten to dampen outlook for Canada's big banks, analysts say

The Canadian flag blows in the wind in the heart of the financial district in Toronto. Tijana Martin/The Canadian Press

Canada’s big banks are already coming off a quarter that saw their capital-markets businesses hit hard by market volatility

Canada’s biggest banks could feel the pinch from a weakening domestic economy, but analysts say it is too early to determine how severe that impact might be.

On Wednesday, the Bank of Canada announced it was holding its key interest rate at 1.75 per cent, saying an anticipated economic slowdown in the fourth quarter had been “sharper and more broadly based” than expected.

“After growing at a pace of 1.8 per cent in 2018, it now appears that the economy will be weaker in the first half of 2019 than the Bank projected in January,” the BoC said.

Canada’s big banks are already coming off a quarter that saw their capital-markets businesses hit hard by market volatility, affecting profit for the three months ended Jan. 31.

DBRS Ltd. warned Wednesday of what a cooler Canadian economy could mean, noting that the Big Six lenders saw their collective earnings increase 4.9 per cent in the first quarter year-over-year, but decrease 7.8 per cent quarter-over-quarter.

“For the balance of 2019, DBRS expects earnings growth for the large Canadian banks to be tempered given the weaker-than-expected start to the year and slowing economic growth, which is likely to constrain income growth,” the credit-rating agency said. “However, despite challenging market conditions, Q1 2019 results reflected the highly diversified core earnings power of the large Canadian banks.”

The Bank of Canada had said Wednesday that consumer spending and the housing market had been “soft” in the fourth quarter, although there had been “strong growth” in employment and labour income.

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Source: Geoff Zochodne | Financial Post