Canada’s six major banks are likely to set aside a total of C$4.5 billion in provisions for loan losses in the third quarter, up nearly 27% from a year ago, as bankruptcies rise and lenders brace for credit card and other defaults in a tough economy.
Banks, which control a large part of the country’s banking market, could feel the impact of increased borrowing costs, falling employment and the possibility of a recession weighing on consumer and business sentiment.
“Third-quarter results are likely to reflect the difficult state of the Canadian economy. Banks are expected to see slow loan growth while borrowing costs continue to rise,” said Ebrahim Poonawala, analyst at BofA Securities.
Overall, the TSX Banks Index has performed worse this year, with growth of 8.3%, than the broader TSX Index, which has increased by 10%.
The full benefits of the Bank of Canada’s two rate cuts this year are unlikely to be reflected in deposit costs and interest expenses in the third quarter.
“With the Bank of Canada being more aggressive than expected in cutting rates, we are more concerned about the near-term outlook… earnings will have to be much stronger than expected to support the banks,” said Jefferies analyst John Aiken.
US BUSINESS IN FOCUS
All eyes will be on TD Bank on Thursday, which will be the first bank to report its third-quarter results, as investors await details of the U.S. Department of Justice’s investigation into deficiencies in its anti-money laundering program.
TD, which has made a major push into the U.S. through acquisitions in recent years, has said it would grow organically in the region by setting up new stores after its proposal to buy First Horizon fell through and the investigation led to a pause in its expansion plan.
Bank of Montreal is also expected to report an increase in loan loss provisions due to a potential loss on a loan to U.S. solar company SunPower.
“The overhang related to credit performance, sluggish credit growth and US exposure in general will likely persist until after the US election in November and the Fed begins to initiate the rate-cutting cycle,” said Gabriel Dechaine, an analyst at National Bank. “We need to be patient,” he noted.
Five of the six banks are expected to see loan loss provisions rise by between 28.4% and 45%, while CIBC is forecast to see a reversal in loan loss provisions, according to LSEG data.
