Canada's top banks revealed their Q2 results last week amid lingering economic uncertainty
The second-quarter financial results announced by Canada’s top banks last week reflected a highly uncertain economic environment, with provisions for credit losses surging as four of the top five banks missed analyst estimates.
Those provisions – funds set aside to cover potential future losses due to credit risk – jumped by a combined $1 billion over the first quarter amid fears of a potential looming economic downturn.
Canadian Imperial Bank of Commerce (CIBC) was the only one of the biggest five banks to top earnings estimates, posting adjusted earnings per share (EPS) of $1.70 compared with average expectations of $1.62.
Carl De Souza (pictured top), senior vice president and head of Canadian banking at DBRS Morningstar, told Canadian Mortgage Professional the higher credit loss provisions, which are expected to continue throughout the year, reflected both macroeconomic uncertainty and the current high-interest-rate environment.
“Interest rates have rapidly increased, so highly leveraged Canadian consumers are more susceptible in general to interest rate increases in Canada, and we’re starting to see continued credit normalization from unsustainably low levels throughout the pandemic – particularly in the unsecured portfolios such as credit cards,” he said.
“So when you take a look at that – the higher interest rates, higher debt servicing costs in combination with the uncertainty in the macro environment, what you saw was the impact of inflation, adding in the higher interest rates [and] increasing likelihood of a downturn or recession. The provisions for credit losses are ramping up, and there was a big jump in the Q2 results.”
Royal Bank of Canada (RBC), TD Bank and Canadian Imperial Bank of Commerce (CIBC) became the latest of Canada’s Big Six banks to report a drop in second-quarter profits on Thursday.https://t.co/NJaUx9geym#breakingnews #mortgageindustry #marketupdates
— Canadian Mortgage Professional Magazine (@CMPmagazine) May 25, 2023
Is that a worrisome trend? While banks setting aside additional funds for possible losses might indicate turbulence down the line, De Souza said it also showed prudence on their part – and noted that these were forward projections, rather than concrete losses.
“The fact that they’re ramping up isn’t that unexpected. They ramped them up quite a bit in Q2, and their first-half numbers are quite a bit higher than prior year [when] there were very low provisions for credit losses,” he said.
“And so we’d want to see with the higher debt servicing costs and inflation eating into consumers’ disposable income, how consumers continue to manage as their savings levels form the pandemic continue to come down and they continue to alter their spending behaviours.”
What’s impacting the banks’ bottom lines?
Recent banking turmoil in the US means that funding costs south of the border have ticked upwards – a development that’s had repercussions for many of Canada’s top lenders who have significant presences in the US.
While higher interest rates have helped boost the top Canadian banks’ net interest income growth, those steeper funding costs could moderate that net interest margin going forward, De Souza said, while loan growth also started to slow in Q2 as lenders took a more conservative stance in the current climate.
That combination of moderating mortgage lending volumes, narrowing net interest margins and funding costs is counterbalanced to some extent by diversification in the leading banks’ portfolios, he added.
“[It’s] a fairly challenging environment for them. They still have, however, a very diversified business line not only for product and business lines, but also by geography,” he said. “So the diversification definitely helps.
“And I think that also helps to manage the ebb and flows when you have a diversified set of portfolios. You’re coming from a position of strength out of it.”
How did each bank fare in Q2?
Bank of Montreal (BMO) reported adjusted EPS of $2.93, below analysts’ expectations of $3.16 for the quarter, while Bank of Nova Scotia (Scotiabank) saw adjusted EPS come in at $1.70 compared with forecasts of $1.77.
At Royal Bank of Canada (RBC), adjusted EPS were $2.65, down from an expected $2.80, while Toronto-Dominion Bank (TD Bank) was expected to report $2.08 per share but instead posted a $1.94 EPS.
Provisions for credit losses at the top five banks totalled $3.37 billion, with the commercial real estate (CRE) space identified by RBC and TD as an area where risk was especially high.
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