Growing wealth management units isn’t enough for Canadian banks

Veritas analyst says strategy won’t protect against market downturn

Growing wealth management units isn’t enough for Canadian banks
Steve Randall

Canada’s banks won’t be able to stave off the impact of a market downturn by growing their wealth management businesses according to Veritas Investment Research.

Analyst Nigel D’Souza has told Bloomberg BNN that bank’s share prices are at risk from a normalization of Canada’s housing market or the credit cycle.

The first set of banking sector second-quarter results released last week have shown that a diversified model, with growth outside the domestic market, is working better for the big banks.

D’Souza says the results showed a slowdown in Canadian personal and commercial banking operations and a build-up of risk in loan books, especially on the commercial side.

He added that, although there has not been a significant uptick in consumer delinquencies despite the growing levels of household debt, the risk could change over the coming quarters.

But it may not take a surge in sour loans to hit the banks. D’Souza cited the impact of the downturn for oil and gas in 2015-16 which was not accompanied by a material rise in loan losses for the banks but share prices still suffered.

Asked about the value of wealth management businesses to the banks, in light of their acquisitions south of the border, the Veritas analyst said that while it was beneficial longer-term in building AUM, wealth management’s cyclical nature means that it is vulnerable to a market downturn.

Flattening yield curve

The flattening of the bond yield curve is going to add pressure to the banks’ ability to grow margins but D’Souza said the reason for the flattening curve is a risk.

As it is lower growth expectation rather than monetary policy that is driving the change, he says that banks will likely need to increase provisions for loan losses.