We believe there will be a deterioration in the macro outlook for the Big Six banks: Nigel D’Souza
A financial services analyst says he expects big Canadian banks will downgrade their economic forecasts, especially those used to model credit losses, but won’t yet confirm a recession as they report their quarterly earnings this week.
“I don't think you're going to get a confirmation of recession, because credit conditions are still pretty benign and the employment picture is still fairly strong,” Nigel D'Souza with Veritas Investment Research told BNN Bloomberg Monday.
His comments came ahead of Scotiabank’s expected Tuesday results for the three months ending Oct. 31, followed by the other major banks reporting throughout the week. That three-month period saw the Bank of Canada raise its key interest rate twice, and analysts will be watching this week to see how the sector is set up to weather a potential slowdown next year.
D’Souza said he considers the recession discussion unlikely to be on the table for bank management until the unemployment rates rises to the point that credit losses from repaired loans move higher, something he doesn’t see materializing in this weeks’ reports.
The assumptions from last quarter’s reports were “a bit optimistic” compared with current economic forecasts, D’Souza said, meaning the economic outlook of banks will likely deteriorate, though he said the impact will vary across different institutions.
D’Souza said he expects banks to set aside more money in provisions for credit losses on performing loans – or loans where payments are up to date – but he considers it “too early” for impairments on loans to pick up, calling that trend “more of a 2023 story.”
“We think there's going to be a deterioration in the macroeconomic outlook for Canada's big six banks that's going to put upward pressure on credit losses for performing loans,” he said.
“That being said, it won't be uniform across banks, some will provision more, some will provisional less, and that's dependent on how much excess reserves (they) are currently carrying.”
Some banks like CIBC and Toronto-Dominion are still carrying reserves from the pandemic when expected credit losses didn’t materialize, D’Souza said, which will help them “buffer" credit losses, while others like Scotiabank have fewer reserve funds available.
Household debt may also play into the banks’ economic outlook, D’Souza said, with a faster increase in interest rates and higher rates likely leading to more credit losses. The Bank of Canada’s key interest rate has been raised to 3.75 per cent; another rate decision by the central bank is expected on Dec. 7.
There could also be some “disappointment” on margin expansion this quarter, D’Souza said, as some banks have been hedging around interest rates.
- With files from The Canadian Press