Canada’s largest banks are expected to report softer financial results in the second quarter, as high borrowing costs continue to burden Canadians facing debt.
Overall, earnings could drop by as much as four per cent from earnings in the same quarter last year, according to analyst forecasts.
The main drivers will likely be higher provisions for credit losses — money banks set aside to cover defaults and delinquencies — and slower loan growth, especially when it comes to mortgage lending.
“We continue to see signs of credit deterioration, and we are still keenly aware that mortgage renewal shock continues,” Darko Mihelic, equity analyst at RBC Capital Markets, wrote in a note to clients last week. “Although interest rates are expected to fall, there will not be significant relief for mortgage borrowers this year.”
More than $900 billion in mortgages at Canadian banks are set to renew by 2026, with some borrowers seeing payments rise by nearly half at renewal, according to a November report by Mihelic.
As of February, Canadian business bankruptcies were near levels seen in 2009, while delinquency and credit card trust loss rates were also on the rise.
TD Bank kicks off the earnings season Thursday morning. All eyes will be on any new details released on its ongoing anti-money laundering (AML) probes. The bank announced in April it took an initial provision of $450 million (U.S.) to cover potential penalties by a U.S. regulator investigating its AML department. Analysts are estimating TD’s earnings per share (EPS) to fall 3.14 per cent to $1.85 in Q2 from $1.91 recorded at the same time last year.
Scotiabank reports on May 28, followed by BMO and National Bank on May 29. CIBC and RBC both announce on May 30.
Higher capital requirements — funds banks must have on hand to safeguard against an economic downturn — and mounting expenses will also pressure profits this quarter, experts say. These costs will be partly offset by gains from layoffs and other restructuring efforts made last year.
“We believe that the Canadian bank earnings trends are close to an inflection point,” Sohrab Movahedi, an analyst at BMO, wrote in his research note.
“Last year’s triple whammy of higher minimum regulatory capital requirements, credit reserve building, and negative operating leverage from double-digit noninterest expense growth should moderate starting this quarter and improve through 2025.”
Future performance will depend on the Bank of Canada’s success in combating inflation while avoiding a recession by manipulating the policy interest rate. On Tuesday, Canada’s annual rate of inflation fell to 2.7 per cent in April, from 2.9 per cent a month earlier, while economists are saying an interest-rate cut in June or July is probable.
“We continue to have a cautiously optimistic view on the group predicated on a soft landing for the economy,” Mike Rizvanovic, managing director at Stifel Canada covering Canadian banks and diversified financials, wrote in his note.
