April 6, 2018

Canada's banking industry facing challenges from fintech and housing market slowdown

OTTAWA--Canada's banking industry is facing increased competition from financial technology firms and weakening demand for mortgages and other consumer debt as interest rates continue to rise. Despite these challenges, pre-tax profits in Canada's banking sector continue to trend upward and are expected to climb to over $95 billion this year, according to The Conference Board of Canada's latest Canadian Industrial Outlook: Banking.

"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," said Michael Burt, Director, Industrial Economic Trends, The Conference Board of Canada. "Technological advances are also impacting Canada's insurance industry, which is changing the way they do business."


> Canada's banking services industry will see output grow by an average of 2.6 per cent annually through 2022.
> Pre-tax profits in Canada's banking industry are expected to reach over $95 billion in 2018.
> Pre-tax profits in Canada's insurance industry are forecast to reach $13.3 billion in 2018.

Financial technology (fintech) firms both support and compete with traditional financial institutions. 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 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.

With Canadian interest rates expected to continue rising through to 2020 and more stringent mortgage regulations on the horizon, mortgage demand is expected to drop considerably over the next several years, which will weigh on the banking sector's profitability. In addition to mortgages, growth in consumer loans and lines of credit are also anticipated to slow. While real household consumption rose 3.5 per cent 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.

Canada's insurance industry is facing similar challenges. In the life insurance segment, insurers are trying to attract enough new enrollees to offset the costs caused by Canada's aging population, although this will prove difficult. On the property and casualty side, rising interest rates and more stringent mortgage regulations will cool housing markets and limit demand for home insurance. In addition, recovering oil prices and record-high levels of household debt will slow the pace of automotive sales, affecting auto insurers. On a positive note, insurers do stand to benefit from rising interest rates as they will earn higher returns on their investments.

Technology is also driving change for the insurance industry. Consumers expectations are changing, in addition to a good price, they increasingly expect simplicity, speed, transparency, and customization. Innovative insurance companies are responding with services like "instant" binding and claims payouts, increased customization in policy options, and the use of sensors to customize the underwriting of risks and reduce the probability of claims. Although automation is reducing the need for certain types of jobs, technology is also driving an increased need for higher wage IT positions. This is putting upward pressure on industry wages.

Overall, output in the insurance industry is anticipated to grow by an average of 1.7 per cent annually through 2022. Although pre-tax profits will dip by 9.6 per cent this year, they will remain healthy at $13.3 billion,



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