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Canadian banks' record deposits, sluggish lending to drive 3rd straight profit drop

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TORONTO, Nov 25 (Reuters) - Canadian banks are set to post a drop in fourth-quarter profits as margin pressures are exacerbated by a surge in deposits to a record and sluggish loan growth.

Analysts estimate Canada’s six biggest lenders - Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada - will see profits decline nearly 20% from a year earlier, and about 4% from the previous quarter, the third straight quarterly profit drop.

BMO and Scotiabank kick off results reporting on Tuesday next week, followed by RBC and National Bank on Wednesday and CIBC and TD on Thursday.

“The worst of the credit provisions are behind the banks,” said Brian Madden, portfolio manager at Goodreid Investment Counsel. “Deposit growth is favourable as a source of capital because deposits...are cheap. But that’s overwhelmed by the fact that the rates at which they’re lending have come down even faster.”

Canadian households and businesses have about C$170 billion ($130 billion) of excess cash, the highest in recorded history, with much of this stashed in bank accounts, CIBC economists wrote in a note last week. The cash accumulation was driven by government assistance programs in response to the coronavirus pandemic, and a decline in spending on non-essential items, they said.

As a result, interest margins at Canada’s six biggest banks, which declined 26 basis points year-on-year in the third quarter to record lows, are set to fall by low single digits in the following three months, National Bank Financial Analyst Gabriel Dechaine wrote in a note last week.

Canada’s six biggest banks were sitting on a record C$4.3 trillion in deposits as of July 31.

Data from the Office of the Superintendent of Financial Institutions show deposits held by Canada’s largest banks rose 14% in September from a year earlier.

The deposit growth, combined with slower lending growth across retail and business segments due to Canada’s uncertain economic outlook, will put further pressure on margins even though interest rates are now stable, said Edward Jones analyst James Shanahan.

While mortgage balances are up 6% from a year earlier, every other lending category has seen, or is headed for, declines, Dechaine said, adding these trends are expected to persist.

Even so, loan growth is expected to improve into fiscal 2021, as stimulus measures, housing market strength and a coronavirus vaccine lifts consumer spending and business investment, CIBC bank analysts wrote in a separate note. ($1 = 1.3093 Canadian dollars) (Reporting by Nichola Saminather Editing by Denny Thomas and Lisa Shumaker)

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