Fitch: Canada's big banks hold profits; oil and rates manageable

Five of the six largest Canadian banks reporting earnings thus far showed mixed profit performance in the first fiscal quarter, with the de minimus impact from oil's declines, says Fitch Ratings. Canada's surprise January rate cut further pressures net interest margins, but may limit near-term asset quality deterioration as the rate cut helps forestall loan payment stress.

Overall revenue gains were fair for the quarter, averaging about 5% higher year over year and driven by single-digit increases in net interest income across all five banks, including CIBC, National Bank of Canada, Bank of Montreal (BMO), Royal Bank of Canada (RBC) and Toronto-Dominion. Non-interest expenses rose by an average of about 7%, contributing to an average reported net income decline of just 1.6%, after adjusting for a one-time gain affecting CIBC's earnings in the year-ago quarter, and excluding RBC, which reported a 17.4% increase in reported net income.

Banks with wealth management and capital markets segments benefited from strong equity asset valuations and higher market volatility. Foreign exchange and oil price volatility may lead to increased hedging by clients, which may continue to support higher capital markets activities.

In Fitch's opinion, the more significant risk of lower oil prices is from the second-order impacts of potentially higher unemployment rates or losses on lending commitments for businesses and projects supporting the oil industry.

Several banks affirmed that they continue to have risk appetite for the energy sector, although demand for energy-related credit may wane for both reserve-based projects and ancillary energy services-related businesses. More energy projects are still likely to be delayed or scrapped as businesses retrench and reduce oil-related capital expenditures.

Provisioning related to oil price declines was very limited, but remains a potential likelihood later in the year should oil prices remain at or below current levels. Canada's largest banks have less than 10% of their total wholesale loans classified as oil and gas, which Fitch sees as manageable direct exposure.

Allowances for credit losses and gross impaired loans at remain very low and provisions for credit losses relating to oil exposures were near zero in the quarter. There was also no significant indication that delinquencies are up ticking in Canada's provinces with higher oil exposures, such as Alberta.