Canada’s banks are relying on their capital-markets divisions to crank out profit growth while their core lending businesses remain hampered by the country’s delayed reopening.

Bank of Montreal kicks off the fiscal second-quarter reporting season on Wednesday, with Canada’s six largest banks projected to post adjusted earnings that more than doubled from a year earlier, according to analysts’ estimates compiled by Bloomberg. That’s mostly because profit in the year-earlier period plunged as the lenders set aside record amounts of capital to absorb defaults they were bracing for. Compared with the fiscal first quarter, the banks’ adjusted earnings are expected to fall 8.4 per cent on average.

While a wave of pandemic-related loan losses has largely failed to materialize, the banks haven’t seen much lending growth either. Canada’s hot housing market has bolstered mortgage businesses, but the country’s slower vaccination rollout and prolonged lockdowns have held back business loans as well as spending on high-margin consumer credit cards.

“As the economy comes back in the fall and into next year, that’s going to be beneficial in terms of a lot of those business lines, and you’re going to see more business-loan growth over the balance of this year and into next year,” Mike Clare, who helps manage US$1.8 billion (US$1.5 billion) as a portfolio manager at Brompton Group in Toronto, said in an interview. Brompton has shares of all of Canada’s Big Six banks. “Mortgages have been strong, but some other areas of consumer loans have been a bit weaker.”

Reporting Dates

• May 26 - Bank of Montreal
• May 27 - Canadian Imperial Bank of Commerce, Royal Bank of Canada, Toronto-Dominion Bank
• May 28 - National Bank of Canada
• June 1 - Bank of Nova Scotia

The banks’ capital-markets units have helped fill the void, generating record profits as volatile markets kept their trading desks humming and cash-seeking corporations turned to them for equity and debt sales.

Canadian merger-and-acquisition activity got off to a record start this year, adding an infusion of advisory fees to continued strong results from trading and capital-raising. Capital markets-related revenue for the Big Six may increase 11 per cent from the first quarter, Paul Holden, an analyst at Canadian Imperial Bank of Commerce, estimated in a note to clients.

Also hampering the main lending businesses are persistently low interest rates, which are keeping margins tight. Long-term interest rates have risen this year, and the trend should eventually help the banks’ earnings. But net interest margins -- the difference between what banks make from lending to borrowers and what they pay depositers -- should remain “flattish” this quarter, putting the onus on banks to keep costs in check, Holden said.

“This is another quarter where expense management will grab a lot of attention due to challenging net interest income trends,” Holden said in the note. “We expect management teams will tightly control fixed expenses while variable compensation will likely show upward pressure due to strong capital-markets results” and rising share prices.

The S&P/TSX Commercial Banks Index gained 21 per cent this year through Monday, with Bank of Montreal up 28 per cent and National Bank of Canada rising 31 per cent.