Banking in transition: 2022 year-end results analysis
Fiscal Year 2022 will be remembered as a year of great change. To address soaring inflation the Bank of Canada raised interest rates seven times since October 27th, 2021, cumulatively a 400 basis points increase to its policy rate that is currently 4.25%. On December 8th, 2022 the Office of the Superintendent of Financial Services (OSFI) raised the capital buffer that Financial Institutions must hold to three percent, citing high-levels of household indebtedness and the rapid rise in interest rates as the key macro-economic factors driving its decision.
As of Q2, 2022 the household debt-to disposable income ratio was near an all-time high of 183.99 according to Statistics Canada. OSFI also increased the range of the required capital buffer to between zero and four percent starting in February 2023 (the previous range was from zero to 2.5 percent). Since its introduction in 2018, the capital buffer has been OSFI’s tool to provide a capital reserve range applicable to Canada’s largest banks and is baked into the common equity tier 1 ratio (CET 1 ratio) that compares a bank’s capital against its risk-weighted assets. This change in regulation raises the minimum CET 1 ratio for Canada’s major banks from 10.5% to 11%. As KPMG’s analysis of the 2022 full year results shows, all the big 6 banks have CET 1 ratios well above the required regulatory minimums with the average being 13.6%, a 0.28% increase year over year.
So how have the major banks performed in this environment of tightening monetary and regulatory policies? In terms of top line growth, aggregate total revenue for the big 6 banks in fiscal year 2022 was $194.6 billion, a 9.2% increase from fiscal year 2021. This growth is comprised of $102.0 billion in net interest income (an increase of 11.3% year over year) and $92.6 billion in non-interest income (a 5.1% increase year over year) and outpaces average cost growth of 5.5% for the major banks. Given these differences between revenue and cost growth rates, adjusted net income on average grew by 2.8% to an aggregate of $60.7 billion. Growth in aggregate adjusted net income in fiscal 2022 is driven by a combination of factors including continued strength in consumer credit participation and a modest increase in net interest margins.
According to TransUnion’s Q3 2022 Credit Industry Insights Report, credit participation reached a new record high with 27.9 million Canadians having active credit products with a total outstanding balance of $2.29 trillion. Average net interest margins increased modestly year over year to 1.73% as the impact of rising interest rates begins to take hold and fixed term loans gradually re-adjust to today’s higher lending rates.
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