Analysts anticipate a more cautious outlook from Canadian lending giants in 2024's final quarter
Analysts are predicting a more conservative outlook from Big Six banks in their upcoming fourth quarter earnings reports, with specific concerns about consumer lending.
Mario Mendonca, managing director and bank analyst at TD Cowen, warns that the economic environment has softened since the third quarter.
"Where the weakness is coming from is in the Canadian consumer in particular. And if I want to be really specific here, I’d say the unsecured Canadian consumer… credit cards, auto loans and some lines of credit,” he told BNN Bloomberg.
While credit loss provisions are expected to be the key point, Mendonca doesn't expect much panic about mortgage-related risks, which he said remain "safe".
The outlook is expected to differ from one bank to the next. Royal Bank of Canada (RBC) is currently trading at a 15-16% premium to the group, which led Mendonca to downgrade the stock from buy to hold. This recommendation reflects the bank's current valuation rather than a negative forecast for 2025.
However, Bank of Nova Scotia’s outlook tells a different story. Recently bumped up to a buy recommendation, the bank experienced developments since its leadership changes in 2022. Under new CEO Scott Thomson, Scotiabank has implemented a management overhaul.
“Scotia used to be among the most efficient banks in the group. Their efficiency ratio and operating level has been very weak over the last five years, and I argue that this management team is going to reinstitute that focus on efficiency,” he said.
Mendonca pointed to Scotiabank's strategic emphasis on high return-on-equity businesses, but especially in capital markets. "If the ROE improvement plays out in 2025, my argument is that it's going to support the stock," he noted.
The bank's stock is up over 30% year to date.
Investors are encouraged to pay close attention to the upcoming earnings reports for insights into credit loss provisions, consumer lending trends, and individual bank strategies. Reports will highlight a critical assessment of the Canadian banking sector's current financial health.
