DBRS Morningstar: Large Canadian Banks: Cautious Optimism Heading into 2022

TORONTO--(BUSINESS WIRE)--The Canadian banking outlook for 2022 remains cautiously optimistic despite persistent uncertainties related to the Coronavirus Disease (COVID-19) pandemic, inflation and related supply chain bottlenecks, rising interest rates, and wage growth pressures. Strong credit quality, an improved macroeconomic outlook, and government support programs helped propel the Big Six to strong performances and improved year-over-year returns on equity in F2021. Despite net interest margin pressure from low interest rates, the banks' highly diversified franchises allowed them to capitalize on elevated trading and client activity in their capital markets businesses in the first half of F2021. DBRS Morningstar does not expect the level of provision for credit losses (PCL) reversals or heightened capital markets activity recorded in the first half of F2021 to repeat in 2022.

Key highlights include:

• Drivers of profitability are expected to shift heading into 2022, from PCL reversals and elevated capital markets activity to higher net interest income from increases in interest rates and higher margin nonresidential mortgage lending volumes.
• Modest deterioration in PCL and asset quality metrics from unsustainably low levels is expected as a result of higher loan volumes and potential pandemic-related impacts. However, the magnitude and pace of interest rate increases may have a larger impact on credit quality, particularly if the tightening cycle leads the Canadian economy into recession.
• Elevated capital levels heading into 2022 are expected to translate into share buybacks, acquisitions, or a combination of the two.

“An increasing interest rate environment in both Canada and the United States should bolster net interest income and earnings. This will help offset modest asset quality deterioration from unsustainably low levels as government support tapers off. Supply-demand imbalances continue to fuel house price appreciation. After moderating during 2020, consumer household debt levels have been on an upward trend and there has been a surge into variable rate mortgages since April 2021, as the spread between fixed-rate and variable-rate mortgages widened. Going into 2022, DBRS Morningstar expects the banks to effectively deploy capital in order move their CET1 ratios closer to the 11% to 12% range,” said Carl De Souza, Senior Vice President, North American FIG.

To read the full report, click here: https://www.dbrsmorningstar.com/research/391496/large-canadian-banks-cautious-optimism-heading-into-2022

The DBRS Morningstar group of companies consists of DBRS, Inc. (Delaware, U.S.)(NRSRO, DRO affiliate); DBRS Limited (Ontario, Canada)(DRO, NRSRO affiliate); DBRS Ratings GmbH (Frankfurt, Germany)(EU CRA, NRSRO affiliate, DRO affiliate); and DBRS Ratings Limited (England and Wales)(UK CRA, NRSRO affiliate, DRO affiliate). For more information on regulatory registrations, recognitions and approvals of the DBRS Morningstar group of companies, please see: https://www.dbrsmorningstar.com/research/highlights.pdf. The DBRS Morningstar group of companies are wholly-owned subsidiaries of Morningstar, Inc. © 2022 DBRS Morningstar. All Rights Reserved. The information upon which DBRS Morningstar ratings and other types of credit opinions and reports are based is obtained by DBRS Morningstar from sources DBRS Morningstar believes to be reliable. DBRS Morningstar does not audit the information it receives in connection with the analytical process, and it does not and cannot independently verify that information in every instance. The extent of any factual investigation or independent verification depends on facts and circumstances. DBRS Morningstar ratings, other types of credit opinions, reports and any other information provided by DBRS Morningstar are provided “as is” and without representation or warranty of any kind. DBRS Morningstar hereby disclaims any representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability, fitness for any particular purpose or non-infringement of any of such information. In no event shall DBRS Morningstar or its directors, officers, employees, independent contractors, agents and representatives (collectively, DBRS Morningstar Representatives) be liable (1) for any inaccuracy, delay, loss of data, interruption in service, error or omission or for any damages resulting therefrom, or (2) for any direct, indirect, incidental, special, compensatory or consequential damages arising from any use of ratings and rating reports or arising from any error (negligent or otherwise) or other circumstance or contingency within or outside the control of DBRS Morningstar or any DBRS Morningstar Representative, in connection with or related to obtaining, collecting, compiling, analyzing, interpreting, communicating, publishing or delivering any such information. No DBRS Morningstar entity is an investment advisor. DBRS Morningstar does not provide investment, financial or other advice. Ratings, other types of credit opinions, other analysis and research issued or published by DBRS Morningstar are, and must be construed solely as, statements of opinion and not statements of fact as to credit worthiness, investment, financial or other advice or recommendations to purchase, sell or hold any securities. A report with respect to a DBRS Morningstar rating or other credit opinion is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. DBRS Morningstar may receive compensation for its ratings and other credit opinions from, among https://www.dbrsmorningstar.com/disclaimer/ others, issuers, insurers, guarantors and/or underwriters of debt securities. DBRS Morningstar is not responsible for the content or operation of third party websites accessed through hypertext or other computer links and DBRS Morningstar shall have no liability to any person or entity for the use of such third party websites. This publication may not be reproduced, retransmitted or distributed in any form without the prior written consent of DBRS Morningstar. ALL DBRS MORNINGSTAR RATINGS AND OTHER TYPES OF CREDIT OPINIONS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AT https://www.dbrsmorningstar.com/about/disclaimer. ADDITIONAL INFORMATION REGARDING DBRS MORNINGSTAR RATINGS AND OTHER TYPES OF CREDIT OPINIONS, INCLUDING DEFINITIONS, POLICIES AND METHODOLOGIES, ARE AVAILABLE ON https://www.dbrsmorningstar.com. Users may, through hypertext or other computer links, gain access to websites operated by persons other than DBRS Morningstar. Such hyperlinks are provided for convenience only, and are the exclusive responsibility of the owners of such websites. DBRS Morningstar does not endorse the content, the operator or operations of third party websites. DBRS Morningstar is not responsible for the content or operation of such websites and DBRS Morningstar shall have no liability to you or any other person or entity for the use of third party websites.