NEWS / Foreign Exchange

Will US FDIC-insured institutions maintain their profit levels?

Summary

• US deposit taking institutions have seen six consecutive years of record profits.

• That said, net interest income and non-interest income, as a proportion of average assets, have declined.

• Deposit taking institutions??™ recent profit gains have been spurred by a reduction in loan loss provisions and by the containment of growth in operating expenses.

• The soft real estate sector started to impact loan losses during the second half of 2006. Judging by the rise in non-performing loans and other past due loans, we believe that loan losses will remain high during 2007.

• If the ratio of pre-tax net operating income as a % of assets is to be maintained, interest rates will have to evolve such that the net interest income of deposit taking institutions increases. However since we do not anticipate a return to a significantly positive yield curve, such a movement is by no means certain.

Weekly indicators

United States ??“ GDP grew at an annualized rate of just 1.3% during the recent quarter, its slowest pace in four years. On page A2, the reader will note that consumers did their part, by boosting their consumption expenses by 3.8%. Residential construction, inventories and net exports all subtracted from growth. Business investments grew by 2%, a surprisingly strong performance, given previous durable goods orders reports. Productivity growth was likely particularly weak during the quarter, given the strong level of employment growth. New orders of nonmilitary production material rose in March, though this did not prevent them from falling by 20.5% (annualized rate) for the quarter as a whole. Existing home sales during March pulled back by 9.5%. Inventories of unsold houses rose to 7.3 months worth of supply.

Canada ??“ The Bank of Canada left its key rate unchanged despite the uncertainty surrounding the US economy and the threat (which it recognizes in its latest press release) that inflation could rise above its forecast level. According to a Statistics Canada poll, manufacturers expect production to rise during the second quarter, for the first time in five quarters. It is however possible that the appreciating Canadian currency could sap manufacturers??™ morale. That said, improving prospects seems to be concentrated in Ontario. Quebec manufacturers are forecasting a pullback in production. In the country as a whole, manufacturers expect to step up their hiring, however that is not the case in either Quebec or Ontario, which host 75% of Canadian manufacturing sector jobs.