The Canadian banking sector is poised to reveal its fourth-quarter earnings, with market analysts anticipating a mixed bag of results. While four of the six largest banks are projected to post earnings growth, the focus is shifting towards their 2024 forecasts, considering factors like interest rate cuts, a wave of mortgage renewals, and the evolving economic climate in the United States.
Table Content:
Canada’s dominant financial institutions – Royal Bank of Canada (RBC), TD Bank, Bank of Montreal (BMO), CIBC, Bank of Nova Scotia, and National Bank – collectively control over 90% of the nation’s loans and deposits. The past year presented numerous challenges, compelling these lenders to bolster loan loss provisions in anticipation of rising delinquencies stemming from elevated interest rates and cost of living pressures.
However, recent quarters have witnessed a more positive trend. Declining interest rates, controlled expenses, cautious lending practices, and a robust investment banking environment have contributed to improved profitability. Bank of America analyst Ebrahim Poonawala predicts “accelerating earnings per share growth” in the fourth quarter but also anticipates a degree of caution from bank management due to prevailing macroeconomic uncertainties.
LSEG data indicates a projected net income growth between 2% and 32% for four of the largest banks, excluding TD and BMO, which are expected to experience declines between 3% and 18%, respectively. Each bank also faces unique challenges. TD continues to grapple with anti-money laundering issues, while BMO navigates a complex loan portfolio in the United States. Conversely, analysts remain optimistic about Scotiabank’s turnaround efforts and view National Bank’s acquisition of Canadian Western Bank favorably.
Year-to-date stock performance reflects this varied landscape. CIBC has seen a significant surge of 47%, while RBC, National Bank, and Scotiabank have recorded gains between 6.8% and 40%. TD stands apart, with its share value declining by nearly 3% as the bank works to address anti-money laundering concerns following a substantial $3 billion penalty imposed by the U.S. government.
Scotiabank analyst Meny Grauman emphasizes that the current market rally is driven less by anticipated Q4 results and more by the outlook for 2024. Investors are keenly observing factors beyond loan growth, including capital markets revenues and loan loss provisions.
Mortgage Competition Intensifies
While the Bank of Canada’s interest rate cuts have mitigated concerns about mortgage payment shocks, especially with a significant portion of mortgages up for renewal next year, analysts foresee heightened competition in the mortgage market. Canadian homeowners who secured mortgages at lower rates face the prospect of higher rates upon renewal, potentially impacting lenders’ loan growth and contributing to increased mortgage delinquency. Most banks have proactively sought to lessen the impact of payment shock by offering various options, such as lump-sum payments.
RBC Securities analyst Darko Mihelic estimates approximately C$315 billion ($224.86 billion) in mortgages will be up for renewal at chartered banks in 2025, with a substantial portion being variable-rate mortgages currently in negative amortization. He notes that fiscal 2026 renewals will see an even larger proportion of variable-rate mortgages.
“Although payment shock is declining,” Mihelic observes, “a significant proportion of mortgagors will still face higher mortgage payments — creating a strong incentive to shop around for the lowest available mortgage rate.”
This competitive pressure will undoubtedly influence the strategies and performance of Canadian banks in the coming year. Their ability to navigate this dynamic environment, alongside the other challenges and opportunities they face, will determine their future success.
