By Robb M. Stewart
OTTAWA--Canadian banks are expected to once again report pressure from rising credit-loss provision as more money is set aside for borrowers squeezed by high interest rates and rising borrowing costs.
The Big Six lenders, which account for roughly 95% of total bank assets in the county and anchor a banking system that has a reputation for being among the most stable in the world, are set to report quarterly earnings over the next week. Analysts project the banks, starting with Toronto-Dominion Bank on Thursday, to post a fall in earnings for the fiscal second quarter as stresses build in the country's financial system and homeowners brace for the shock of a jump in mortgage repayment costs.
A further rise in provisions for credit losses, continuing the trend of recent quarters since the central bank began a campaign of aggressively lifting rates to tackle inflationary pressures, is expected to loom over a period of continued soft loan growth.
Core per-share earnings, the metric followed by industry analysts, are expected to fall 2.8% on average, according to data compiled by FactSet. That ranges from a projected 8.8% fall in earnings at Bank of Nova Scotia to a 4.2% rise at Royal Bank of Canada after the country's biggest bank by market value closed the acquisition of HSBC's Canadian operations.
Net interest income, the difference between revenue from interest-bearing assets such as home loans and the cost of servicing liabilities, is expected to rise 6.3% on average for the banks.
One key question that analysts are weighing is whether the latest quarter will mark a peak for provisions if, as widely expected, the Bank of Canada pivots to cutting rates in the coming months as inflation continues to ease.
Bank of Montreal analyst Sohrab Movahedi is among those who believe earnings trends could be nearing an inflection point and will be watching for signs provisioning has peaked. Guidance from bank management last quarter envisaged peak provisions during this fiscal year.
"Last year's triple whammy of higher minimum regulatory capital requirements, credit reserve building and negative operating leverage from double-digit non-interest expense growth should moderate starting this quarter and improve through fiscal 2025," he said.
Data in Canada shows delinquencies are on the rise in unsecured retail credit and small-business bankruptcies are increasing. At the same time, the majority of outstanding residential mortgages are set to renew at higher interest rates, which the country's bank regulator has said could result in a higher number of loans falling into arrears or default. The Bank of Canada, however, estimates that Canadian homeowners have the financial capacity to deal with increased monthly payments.
RBC Capital Markets modeling calls for a roughly 3% rise in impaired credit-loss provisions on the quarter before, while Mike Rizvanovic at Keefe, Bruyette & Woods anticipates the Big Six will see a 2% rise in total credit-loss provisions on average, led by an expected 11% jump at TD Bank.
RBC's Darko Mihelic said that while mortgage-renewal shock continues for Canadians and any cut to interest rates won't bring much relief to mortgage borrowers this year, an expected soft landing for Canada's economy should translate into mildly falling provisions in 2025. "Although we have seen evidence of credit deterioration, we believe our previously modeled (impaired provisions for credit losses) were a touch too high," he said.
Write to Robb M. Stewart at robb.stewart@wsj.com
(END) Dow Jones Newswires
May 22, 2024 15:08 ET (19:08 GMT)
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