Amidst a slowing Canadian housing market spurred on by the B-20 mortgage stress test, new credit growth continues to slow. As per the Bank of Canada, household credit growth grew by 3.03% Year-over-Year in December, the slowest past of growth since June 1983. The slowdown has also been reflected in residential mortgage credit growth which slipped to 3.13% the weakest pace since April, 2001.

As a result, and perhaps rather unsurprisingly, Canadian bank earnings largely disappointed in Q1. Starting with the Laurentian Bank of Canada, shares fell the most in almost nine years after the lender said it would cut its workforce 10% after posting earnings that missed analysts’ estimates for a third straight quarter. Net income fell 32% to C$40.3 million for the quarter ended Jan. 31.

The disappointment spread unevenly to CIBC & TD Bank. The Canadian Imperial Bank of Commerce hiked its dividend following first quarter profits sinking 11% to $1.18 billion. While TD reported a 2.4% increase in earnings, yet still falling short of overall expectations. Both banks reported an increase for loan loss provisions, as credit conditions shift to the downside. CIBC loan loss provisions more than doubled from last year, while TD Bank set aside $850M for soured loans, up 23%.

Canadian Bank Loan Loss provisions.
Source: Bloomberg

On a more positive note, RBC Bank, often considered the gold standard in Canadian banking, met expectations, although also succumbed to the pressures to increase loan loss provisions by 54%. Perhaps illuminating the shift in sentiment.

With downwards pressure mounting on home prices, and a diminishing desire from Canadian mortgage insurers to increase their exposure (insured mortgages fell 8% Y/Y in December) new loan originations are likely to remain rather benign.