Cracks in Canada banks’ armor to show up in 2013?

Canadian banks, many of which recently reported hearty earnings, are expected to see sluggish growth going forward as the economy shifts into lower gear and interest rates are expected to remain intact at ultra-low levels.

Key areas of weakness in 2013 will likely reflect the impact of a softening Canadian housing market and a pullback in borrowing by debt-strapped consumers.

"You have a consumer in Canada that still remains relatively healthy. The labor market is growing slowly, wages are increasing slowly so all of that suggests that banks in that type of environment can do reasonably well," said Craig Fehr, Canadian market strategist for Edward Jones.

"That's offset by the fact that we have a housing market in Canada that is, for all intents and purposes, softening and you have consumers that are already carrying  a lot of debt."

Add to the mix the broader concerns of sluggish global growth, coupled with the U.S. cliff and Europe's debt troubles. That perfect storm is expected to hit bank profitability, most agree.

"We expect the economy to remain sluggish and thus we expect the demand for new loans, particularly at the personal level, where Canadians are carrying a lot of debt, will wane a bit and that will have an impact on bank profitability moving forward," said Fehr.

Royal Bank of Canada kicked off the bank earnings period last week with a surge in profit. On Friday, Bank of Nova Scotia reported a rise in quarterly profit following strong results from Toronto-Dominion Bank, Canadian Imperial Bank of Commerce and National Bank of Canada the day before.

Banks won't likely be able to keep up a robust pace of profit growth, particular where mortgage lending is concerned given rule-tightening measures by Ottawa this summer,  the fourth since 2008. As well, the current low interest rate environment, which nibbles at profit margins, will keep things moderated. This week the Bank of Canada held rates steady at 1 per cent and continued to signal rates may need to go up, not down.

Against that backdrop banks will need to think of ways to keep up the steady stream of profit, said John Aiken, an analyst at Barclays Capital.

Aiken said banks are likely to focus on their external operations in areas such as retail, commercial and corporate banking. Banks may place more emphasis on their wealth management units. Cost-cutting will also be a "mantra in 2013," he added.

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