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Canadian banks seek return of reluctant business borrowers

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Even as Canadian businesses prepare to reopen gradually this summer after a year of intermittent lockdowns, banks are wary about the prospects of a fast uptick in credit growth as an economic recovery remains patchy and cautious commercial clients hold on to record amounts of cash hoarded during the pandemic.

Canada‘s top six banks – Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada – have emerged relatively unscathed from the pandemic, thanks to government support programs and their own loan deferrals.

As traditional lending to businesses dried up, the banks binged on mortgages on the back of a red-hot property market.

That resulted in the average mortgage balance at the six lenders hitting a record C$1.18 trillion ($978.5 billion) in the three months through April, up 9% from a year earlier, surpassing the pace seen during the 2017 housing market peak.

But mortgage growth is expected to slow, said Mike Clare, portfolio manager at Brompton Group, as a surge in home prices since last summer crimps affordability and stricter mortgage rules take effect.

That coupled with an uneven business recovery means Canadian banks’ core lending operations at home could see sluggish growth for much of this fiscal year.

“I am concerned about loan growth going forward,” said Edward Jones analyst James Shanahan. “There’s a fair amount of uncertainty in Canada about the strength and magnitude of the economic recovery due to repeated pandemic-related lockdowns.”

Business loan balances saw year-on-year growth of only 0.2% on average, albeit from a period when many companies drew down credit lines as debt markets seized up early in the coronavirus pandemic. But they grew only 2% to 3% over the past two quarters.

For investors who have driven up banks’ shares to record highs this year, the uncertain outlook may cause some angst. The Canadian bank index has rallied nearly 50% over the past year, versus a 31% increase in the broader index. But the bank index has underperformed the broader market since lenders began reporting results last week.

‘HISTORICAL LOWS’

“I would have expected … that (business) inventory and receivable build would have led to (credit) drawdowns, and you’re not seeing that,” Neil McLaughlin, head of personal and commercial banking at Royal Bank of Canada, said on an analyst call last week. “It’s already kind of lagging, but it will come.”

National Bank of Canada executives said deposits were “stickier” than they had expected at the beginning of the pandemic, with businesses not spending all the cash they hold.

“Drawings on operating lines … are at historical lows,” said Stephane Achard, executive vice president of commercial banking and insurance at the bank. “I would expect those to remain low and gradually creep up over time.”

The six banks beat estimates for second-quarter profit, driven by lower-than-expected provisions for credit losses and strong capital market performances.

While earnings from capital markets businesses, which have “stepped up to fill the void in traditional banking businesses,” could moderate, they should remain strong, given continued volatility in markets and dealmaking, helping offset some of the lag in lending, Clare said.

($1 = 1.2059 Canadian dollars)

 

(Reporting by Nichola Saminather; Editing by Denny Thomas and Peter Cooney)

Economy

Canadian retail sales slide in April, May as COVID-19 shutdown bites

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december retail sales

Canadian retail sales plunged in April and May, as shops and other businesses were shuttered amid a third wave of COVID-19 infections, Statistics Canada data showed on Wednesday.

Retail trade fell 5.7% in April, the sharpest decline in a year, missing analyst forecasts of a 5.0% drop. In a preliminary estimate, Statscan said May retail sales likely fell by 3.2% as store closures dragged on.

“April showers brought no May flowers for Canadian retailers this year,” Royce Mendes, senior economist at CIBC Capital Markets, said in a note.

Statscan said that 5.0% of retailers were closed at some point in April. The average length of the closure was one day, it said, citing respondent feedback.

Sales decreased in nine of the 11 subsectors, while core sales, which exclude gasoline stations and motor vehicles, were down 7.6% in April.

Clothing and accessory store sales fell 28.6%, with sales at building material and garden equipment stores falling for the first time in nine months, by 10.4%.

“These results continue to suggest that the Bank of Canada is too optimistic on the growth outlook for the second quarter, even if there is a solid rebound occurring now in June,” Mendes said.

The central bank said in April that it expects Canada’s economy to grow 6.5% in 2021 and signaled interest rates could begin to rise in the second half of 2022.

The Canadian dollar held on to earlier gains after the data, trading up 0.3% at 1.2271 to the greenback, or 81.49 U.S. cents.

(Reporting by Julie Gordon in Ottawa, additional reporting by Fergal Smith in Toronto, editing by Alexander Smith)

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Economy

Canadian dollar notches a 6-day high

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Canadian dollar

The Canadian dollar strengthened for a third day against its U.S. counterpart on Wednesday, as oil prices rose and Federal Reserve Chair Jerome Powell reassured markets that the central bank is not rushing to hike rates.

Markets were rattled last week when the Fed shifted to more hawkish guidance. But Powell on Tuesday said the economic recovery required more time before any tapering of stimulus and higher borrowing costs are appropriate, helping Wall Street recoup last week’s decline.

Canada is a major producer of commodities, including oil, so its economy is highly geared to the economic cycle.

Brent crude rose above $75 a barrel, reaching its highest since late 2018, after an industry report on U.S. crude inventories reinforced views of a tightening market as travel picks up in Europe and North America.

The Canadian dollar was trading 0.3% higher at 1.2271 to the greenback, or 81.49 U.S. cents, after touching its strongest level since last Thursday at 1.2265.

The currency also gained ground on Monday and Tuesday, clawing back some of its decline from last week.

Canadian retail sales fell by 5.7% in April from March as provincial governments put in place restrictions to tackle a third wave of the COVID-19 pandemic, Statistics Canada said. A flash estimate showed sales down 3.2% in May.

Still, the Bank of Canada expects consumer spending to lead a strong rebound in the domestic economy as vaccinations climb and containment measures ease.

Canadian government bond yields were mixed across a steeper curve, with the 10-year up nearly 1 basis point at 1.416%. Last Friday, it touched a 3-1/2-month low at 1.364%.

(Reporting by Fergal Smith; editing by Jonathan Oatis)

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Economy

Toronto Stock Exchange higher at open as energy stocks gain

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Toronto Stock Exchange edged higher at open on Wednesday as heavyweight energy stocks advanced, while data showing a plunge in domestic retail sales in April and May capped the gains.

* At 9:30 a.m. ET (13:30 GMT), the Toronto Stock Exchange’s S&P/TSX composite index was up 16.77 points, or 0.08%, at 20,217.42.

(Reporting by Amal S in Bengaluru; Editing by Sriraj Kalluvila)

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