TORONTO ― Canada’s big banks continue to make money, but many reported shrinking profit margins in their latest quarterly reports, and ― in a worrying sign for the economy ― a large jump in money set aside to cover unpaid loans.
That ― along with pressure from the nascent fintech industry ― is putting pressure on the traditional big banks to cut the size of their workforces.
Loan loss provisions, as they are known, jumped by 52 per cent from a year earlier at CIBC; by 45 per cent at Bank of Montreal; by 33 per cent at TD Bank; by 28 per cent at Scotiabank and by 22 per cent at RBC in the fourth quarter of fiscal 2019.
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And while some of that came from the banks’ investment divisions, it seems that Canadian consumers, in particular, are driving this trend. Losses were heavily concentrated in the banks’ Canadian retail banking operations.
Bank of Montreal, for instance, saw loan losses decrease in their U.S. retail division by 11 per cent even as losses jumped 41 per cent among their Canadian customers. Losses were up at TD Bank’s extensive U.S. retail operations, but by far less than in Canada.
It’s the latest sign that Canadian households ― saddled with some of the world’s largest debt burdens ― are running out of spending room. Insolvencies among Canadian consumers ― meaning bankruptcies and consumer proposal filings ― have jumped to their highest level since Canada was recovering from the financial crisis a decade ago.
Canadians are taking on new debt more slowly than a few years ago, squeezing the banks’ profit margins.
The banks are also under pressure from fintech. New digitally based financial services companies are benefiting from lower cost structures and are starting to eat into traditional banks’ business.
A recent survey from business services firm Accenture found North American banks expect to lose up to 15 per cent of their revenue to fintech startups over the next three years.
And bank executives are starting to talk layoffs. The Bank of Montreal announced this week it’s planning to cut five per cent of its global workforce, amounting to more than 2,200 jobs, marking the largest layoffs in Canadian banking in years, according to news reports.
Royal Bank of Canada saw its costs increase on the back of severance payments, but it didn’t say how many jobs have been cut.
“The next couple of years are likely to be challenging,” Royal Bank CEO David McKay told analysts in an earnings call.
“This isn’t an environment where the banks need to hire more employees, in fact it’s the opposite,” Baskin Wealth Management chief investment officer Barry Schwartz said, as quoted at the Financial Times.
“We’re looking at slower revenue and earnings growth going forward from what we’re used to and you’re going to see the banks get leaner.”
The Canadian ‘big short’
Many bearish analysts have been predicting for years that Canadian banks’ long-running winning streak will come to an end once the country’s consumers get to the limit of how much they debt they can carry.
Some hedge funds famously bet against Canadian banks in recent years, on the expectation their stock prices would tumble once Canadian consumers couldn’t borrow more.
For years, those hedge funds famously lost those bets... until now.
While the banks are still profitable, most reported narrower margins than analysts had been expecting, sending their stock prices tumbling. The S&P TSX Banks Index, which measures the value of Canadian bank stocks, lost nearly three per cent of its value since Tuesday, when the banks began releasing their quarterly earnings reports.
Still, many analysts and execs say the level of bad loans at the banks doesn’t constitute a crisis, if it doesn’t get worse. TD Bank’s chief financial officer, Riaz Ahmed, noted that loan losses have been rising from particularly low levels in recent years.