Interest rates and tighter measures play major roles in this development
Weakening activity in the residential real estate sphere along with the growing importance of financial technology firms represent formidable challenges for Canada’s banking industry, according to a new report from The Conference Board of Canada.
“The impact of financial technology firms on the industry is growing, and to date this has been primarily beneficial to the industry. Productivity continues to increase considerably and has been a key driver behind its successful financial performance,” according to Michael Burt, Director of Industrial Economic Trends, The Conference Board of Canada.
In particular, with interest rates likely to see sustained increases through to 2020 and with even stricter mortgage regulations on the pipeline, mortgage activity will continue to slow down over the next several years, further weighing down on bank profits.
“In addition to mortgages, growth in consumer loans and lines of credit are also anticipated to slow. While real household consumption rose 3.5% last year, its strongest increase since 2010, record levels of consumer debt and weaker employment gains will tighten household budgets this year and lead to more moderate growth,” the Board stated in its report summary.
Also, fintechs stand in opposition to traditional financial institutions, the Board emphasized.
“The banking industry has responded by expanding their own digital and online capabilities by partnering with or acquiring fintech companies and have also ramped up their hiring of in-house IT workers to upgrade their own technological infrastructure,” the report explained.
“The result has been robust gains in demand for IT workers in the past few years, while some other types of skills have waned in importance. The resulting productivity gains have been enough to outweigh the negative impact of the shift to higher paid workers.”
However, the Board assured that despite these potential roadblocks, pre-tax profits in Canada’s banking sector are continuing to trend upward, projected to exceed $95 billion this year.
Canada’s banking services segment has been forecast to see output grow by an average of 2.6% annually through 2022, while pre-tax profits in the banking industry are expected to reach over $95 billion in 2018.