Conservative lending shields them from the worst of the market's volatility
Canadian banks’ restrained involvement in the US commercial real estate (CRE) market is offering a glimmer of reassurance to investors.
The downturn rocking the CRE market in the US has impacted banks globally, including those in Europe and Asia. But analysts told Reuters that Canada’s big banks may be shielded from the brunt of these challenges due to their limited exposure in the sector.
“While the space is undoubtedly challenged ... it will be largely unimpactful to the Big-6 Canadian banks given their diverse loan books,” Canaccord Genuity analyst Matthew Lee said in an interview.
Based on quarterly filings, the Canadian Imperial Bank of Commerce (CIBC) has the most significant CRE exposure among its peers, allocating 11% of its loans to the sector.
Meanwhile, other top banks have reported CRE constituting around 8% to 10% of their total lending.
This conservative approach contrasts with some regional lenders in the US that are grappling with unexpected losses, particularly in office and multi-family properties.
As Canada’s Big 6 prepare to release their first-quarter earnings next week, what investors are bracing for is continued pressure from elevated provisions for bad loans.
The banks could see declines of 3.8% to nearly 16%, Reuters reported, citing data from LSEG.
Shilpa Mishra, a managing director at BDO’s capital advisory services, pointed to a shift in the banks’ lending behaviour, with a reduction in commercial and personal loans being a primary change.
Canadian banks have also expanded their presence in the US market, seeking growth opportunities outside the competitive and highly regulated environment at home.
But these efforts have not been without obstacles. Earlier this month, RBC’s Los Angeles-based subsidiary was slapped with a US$65 million fine for failing to keep proper risk controls.
Colin White, CEO and portfolio manager at Verecan, expressed skepticism regarding the returns Canadian banks can achieve in the US compared to their domestic market.
“You just can’t see the returns in the US that they are able to see in Canada,” White told Reuters.
Nevertheless, analysts are expecting resurgence in capital markets revenues is anticipated, with deal activity projected to pick up after a period of stagnation.
RBC Capital Markets has forecasted a 16% growth in earnings from this segment, driven by a backlog of business transactions in Canada waiting to materialize.
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