Loan loss provisions are still climbing
It was a case of different quarter, same story for Canada’s banking giants as the Big Six continued to stash away provisions for potential credit losses in Q3.
Each of the country’s largest banks saw profits weighed down by allowances for potentially souring loans, offsetting encouraging growth in other areas and contributing to a mixed overall performance for the quarter.
Royal Bank of Canada (RBC) posted a surprisingly strong third-quarter performance, while National Bank and Canadian Imperial Bank of Commerce (CIBC) stayed steady – but Bank of Montreal (BMO) missed projected earnings and an ongoing anti-money laundering (AML) investigation south of the border continues to pose problems for Toronto-Dominion (TD) Bank.
There was some room for optimism in the banks’ growing conviction that increasing loan loss provisions would likely end around the midway point of 2025, while many still appear to be eyeing potential opportunities for mergers and acquisitions.
Shilpa Mishra (pictured top), partner and leader, capital advisory at BDO M&A and Capital Markets, told Canadian Mortgage Professional that further consolidation in the space seemed highly likely. “The banks said, ultimately, that they have cash. They have steady capital ratios. There’s a lot of private equity too, sitting on dry powder,” she said.
“The question around consolidation and M&A in banking isn’t if it’s going to happen – but it’s where. RBC implied it’s going to step away from US acquisitions for a bit, given the uniqueness of that market. It’s going to focus on Canada. And they were very clear about that.”
HSBC purchase holding up well for RBC
RBC’s announcement marked its first full-quarter earnings since its high-profile purchase of HSBC’s Canadian business in a blockbuster $13.5 billion deal.
That appears to have been a solid acquisition for the bank, while Mishra noted that National Bank had said it was too early to comment on the impact of its acquisition of Canadian Western Bank (CWB). “But really the focus as I listened to the [earnings] calls,” she said, “is making sure that the banks integrate these acquisitions and continue to realize some of the cost synergies that they planned for.”
Mishra also highlighted that Canada’s financial system continued to be stable despite banks’ cautious outlook on potential future losses and the economic headwinds currently at play.
BMO’s chief economist Doug Porter noted that the Bank of Canada’s decision to lower its benchmark interest rate was expected, but future cuts may be more aggressive.
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That’s not to discount, however, difficulties that many businesses and borrowers continue to experience accessing credit. “Finding the money in Canada in 2024 is like finding a needle in a haystack,” she said. “Essentially, what that means is that the debt market continues to experience sluggish overall growth in the second quarter of 2024 – and I think we’re going to see that for the rest of the year.”
Why has the debt market cooled in recent years?
In its latest Canadian debt market report, released in August, BDO said year-to-date loan issuance had increased by 5% compared with the same time last year, to $2 trillion, although its pace remained much slower than the highs of 2021.
Lender caution is a big factor in that slowdown from three years ago. “Debt structures that are being provided by all lenders, even alternative lenders, are conservative,” Mishra said, “and all deals require assets and personal guarantees – and we’re seeing conservative loan to values.”
Last week, Statistics Canada revealed that the national unemployment rate saw a larger-than-expected increase in August, rising to 6.6% as the economy added a meagre net 22,100 jobs that month.
Recent indicators have pointed to a sluggish labour market that’s “no longer defying the odds”, Mishra said. “It’s cooled on the heels of a more muted economic climate in Canada,” she said.
While the Bank of Canada cut rates by a further 25 basis points in its September 4 decision, the third time in a row it’s reduced its benchmark rate by that amount, Mishra said much attention will now turn to how quickly rates continue to fall. “As we look forward to an economic climate with lowering rates and [the latest] decision by the Bank of Canada, the question isn’t really anymore whether rates are dropping,” she said. “A key question is: ‘Is the Bank of Canada reducing rates fast enough?’”
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