NAFTA casts cloud over bank profit prospects

Canadian banking giants are poised to unleash their quarterly earnings over the next week, and investors will take a close look to see whether anxiety over higher interest rates and an uncertain trade environment are hurting the economy's prospects.

The five big banks represent the engine of the Canadian economy, and are also inexorably linked to the housing market, a topic that is sure to be closely observed when Royal Bank (TSX: RY) is first out of the gate with its numbers Wednesday morning.

The Bank of Canada has hiked its benchmark interest rate four times since last summer, a trend the big banks have passed on to their customers.

More rate hikes are expected, and in theory, higher rates are good news for banks — they get to charge customers higher interest rates for loaning them money.

But that's only true if tighter lending conditions don't discourage drumming up new business.

Currently, the five biggest banks dominate the Canadian mortgage market, providing nearly two-thirds of mortgages.

But even the banks know that dominance can't last forever. Experts warily point out that new tighter mortgage standards announced late last year are likely to slow new mortgage business at the banks between 5% and 12% this year.

Rather than struggling to look for new business, experts say the banks are likely to concede ground to alternative lenders.