Canadian banks are becoming prudent in lending
Canada’s debt market showed moderate growth in the second quarter of 2023 although its performance was slow compared with the past two years, according to a new report by BDO Canada.
Loan issuance year-to-date was $1.3 trillion, up by 10% over the past year. The four areas mainly comprising the total business lending in Canada are real estate (9.4%) and services sectors (15.4%), manufacturing (20.8%), and retail and wholesale sectors (10.8%), the report said.
Bank funding in Canada has become scarcer and more expensive as banks have leaned toward depending on wholesale funding rather than deposits. Lending from Canadian banks has decreased by 5% quarter over quarter.
Laurentian Bank announced in a press release its review of its strategic efforts to maximize shareholder value. Reports are suggesting the bank considering a sale, raising doubts on the stability of the Canadian banking sector.
BDO Global emphasized Canadian banks are generally stable, and "highly regulated with a diversified customer base”. In addition, stress testing conducted on rising rates has performed well so far, the company said.
Last week, the Bank of Canada announced a rate hike of 25 basis points to 5%, with BDO indicating a further increase is possible throughout the rest of the year.
"However, with ongoing healthy consumer spending, continued high employment, and the strong performance of mid-market businesses, a recovery is likely to occur in the early part of 2024," BDO Global said in its report.
The report also states banks and private equity firms are scrutinizing their future investments and that the decisions on investments would be largely based on companies’ environmental, social, and governance (ESG) risk profiles. Lending banks have signed the Net-Zero Banking Alliance, a global group committing to aligning their portfolios with net-zero emissions by 2050.
BDO’s analysis suggests large corporate and mid-market businesses should focus on cash flow forecasting, ramping up risk assessment and management, and tending to their balance sheets.
"Financing providers are looking at businesses’ ability to have contingency plans in place. Banks’ lending volumes are expected to stay moderate during the remainder of fiscal year 2023, with the big six Canadian banks positioned with tighter, yet adequate, levels of liquidity and capital."
