Canada's big banks are about to close another profitable year, but they are already facing expectations that they will lose strength in 2019 and 2020.
Fortunately for banks, they have a lot of steam.
The six major companies – which begin releasing earnings for the fiscal fourth quarter of 2018 on Tuesday – are on track to announce an increase in adjusted annual earnings per share of more than 10% over the previous year.
Earlier this month, CIBC Capital Markets analyst Robert Sedran estimated that the group's 2018 growth would be 11.6 percent, but noted that it expects to decline to seven percent in 2019 and 6.4 percent in 2020 .
"We entered the new fiscal year with what appears to be a still good operating environment (though less than last year), although one that begins to show its age," Sedran wrote.
A Canaccord Genuity note projected a slowdown in EPS growth for the Big Six, from 11% to 2018, to 6% for 2019, to 5% by 2020.
A key hurdle for banks may be the state of the Canadian economy, to which its performance is strongly linked.
An economic update by the federal government last week predicted a two percent increase in Canada's GDP in 2018 and 2019, followed by growth of 1.6 percent in 2020. All three years would be below the observed three percent rate in 2017.
"While Canadian banks can grow above GDP, it is very difficult for them to massively outperform in this context," John Aiken, an analyst at Barclays Capital, said in a telephone interview.
"And so, given the fact that we see some contrary winds in lending, a moderation in the growth of profits is widely expected."
A sharp rise in the US or the global economy can be a mitigating factor, but controlling costs is another area where banks may find it more difficult to continue impressing.
"You can argue that many of the cheaper fruits have already been plucked," Aiken said. "While we think they will continue to be aggressive in managing their costs, this may not have the same impact."
Rising interest rates, which have helped bank margins in the short term, may also begin to weigh more on consumer borrowing and spending.
… (How) we see some contrary winds, a moderation of the growth of the profits is widely expected
John Aiken, analyst at Barclays Capital
In addition, banks entered in 2018 burdened with new housing regulations that a recent Bank of Canada staff note suggested could be loosening control over the mortgage market.
This revised B-20 guideline on home mortgage underwriting, said the analytical note of the BoC team, applies only to lenders regulated by the federal government, not the private lenders.
"Areas with high housing prices such as the Greater Toronto Area (GTA) may therefore see more borrowers getting mortgages from private lenders because they may not be able to qualify with other lenders," he added.
According to the BoC team, the volume of new mortgage loans in the GTA fell year on year for all types of lenders in the second quarter of 2018, but private lenders, mortgage lenders, credit unions and smaller banks saw their share in the increase.
The Big Six, however, saw their home equity portion of mortgages in the GTA, to 72.6%, from 77.5%.
The BoC's note said it currently has no data to verify if this same trend was taking place in other provinces, but National Investment Bank analyst Gabriel Dechaine said in a November note on banks that "egulation and risk of unintended consequences. " are important considerations. "
As of Friday's close, the S & P / TSX Banks index, which includes Big Six, fell 6.4 percent year on year.
Bank of Nova Scotia will be the first of six to report results for the three months ended Oct. 31 on Tuesday. Scotiabank profits will be followed by the Royal Bank of Canada on Wednesday, the Canadian Imperial Bank of Commerce and the Toronto-Dominion Bank on Thursday, then at the Bank of Montreal on December 4 and the National Bank of Canada on 5 December.