TORONTO — Signs of economic slowdown are growing, and Canadian banks could add more evidence this upcoming week.
The Big Six banks are set to report fourth quarter results that analysts expect to show lower earnings, more money set aside tocover bad loans, and hints of rising mortgage strain.
The results come as economic growth has rolled to a near standstill over the last several months, the engine stalled after the Bank of Canada raised its key interest rate to five per cent.
Higher borrowing costs and more cautious banks mean that lending growth has slowed notably.
“The key trend in the banking industry right now is really the decrease in lending across the Canadian market,” said Shilpa Mishra, managing director in BDO's capital advisory services.
The pace of lending growth in the third quarter was about half what it was a year ago, while it was down slightly from the previous quarter, she noted.
Not only are banks slowing the pace of new lending, but they’re setting aside more money for loans that could go or are already going bad as higher interest rates add strain to borrowers. That will be a big influence on earnings.
“We anticipate mixed results from the Canadian banks amid an increasingly uncertain environment,” said Mishra, “This is going to be primarily due to the provision for credit losses.”
RBC Capital Markets analysts are predicting total provisions for credit losses in the sector to increase 13 per cent from the previous quarter to $3.3 billion because the macroeconomic environment has worsened.
The money they’re setting aside is a big part of the reason Scotiabank analyst Meny Grauman expects earnings per share to be down three per cent from the previous quarter, and seven per cent from last year.
“Over the past quarter, we have witnessed a clear deterioration in a host of Canadian macro(economic) indicators, including GDP and employment,” Grauman said in a report.
Unemployment ticked up 0.2 percentage points to 5.7 per cent in October for the fourth monthly increase, while August GDP growth was essentially flat and the flash estimate for September was also unchanged, according to Statistics Canada.
Indications of slowing can be seen in other key areas like real estate, where October home sales were down 5.6 per cent from September sales, which were down 1.9 per cent from August, according to the Canadian Real Estate Association.
“The economy is slowing now, with growth in gross domestic product near zero over the past several months,” Bank of Canada governor Tiff Macklem said last week.
He also noted the inflation rate has fallen from 8.1 per cent in June 2022 to 3.1 per cent last month.
“This tightening of monetary policy is working, and interest rates may now be restrictive enough to get us back to price stability.”
Grauman said the bond market is pricing in a cut from the Bank of Canada by the second quarter of next year, and the U.S. Fed a quarter earlier, but he thinks that’s optimistic.
“We remain skeptical that central banks will be in a position to ease in late 2024, let alone early in the year, and continue to view the risk of higher-for-longer rates as the key macro issue facing Canadian bank stocks.”
He expects consumer finances to be increasingly strained in the higher-for-longer scenario, and will be listening for hints from bank executives of how much strain they expect from borrowers.
Waves of mortgage renewals are coming in the next few years that will push monthly payments higher, and are expected to keep pressure on borrowing.
Banks have been readying for the slowdown by cutting back on expenses, including on staff. Scotiabank said in October it was cutting about 2,700 staff, while RBC announced last quarter it had cut around 900 jobs and planned to cut upwards of 1,900 more. Other banks have also taken some charges related to staffing cuts.
Fourth quarter results could reveal further trimming, but Mishra said she expects much of those job-cutting efforts to be done.
“I don't think there's going to be more of that,” said Mishra. “But we’re definitely going to see more restructuring in the lending and capital market businesses and focus on profitable and higher-margin businesses.”
Overall, the shifts in the quarter will show banks preparing for rockier times, but not likely dramatic swings, she said.
“There isn't that tsunami of distress that we were expecting, there is more focus on cash flow, liquidity management, balance sheet management.”
Scotiabank kicks off earnings on Nov. 28, CIBC, TD Bank and RBC report on Nov. 30, and BMO and National Bank report on Dec. 1.
This report by The Canadian Press was first published Nov. 26, 2023.
Companies in this story: (TSX:RY; TSX:BNS; TSX:TD; TSX:BMO; TSX:CM; TSX:NA)
Ian Bickis, The Canadian Press
