Canada’s big banks likely to end financial year with another profit drop: analysts

Canada's big banks are likely to wrap up a challenging financial year with another quarter of declining profits and rising bad debt provisions amid a slowing economy.

Canada’s big banks are likely to wrap up a challenging financial year with another quarter of declining profits and rising bad debt provisions amid a slowing economy.

The big six banks have axed thousands of jobs this year as investment banking fees lagged and business south of the border weakened due to the U.S. regional banking crisis.

While high interest rates have boosted the banks’ lending margins, residential mortgages, auto loans and commercial real estate loans have slowed as consumers and businesses pulled back.

The fallout from high borrowing costs on commercial real estate lending and auto loans as well as the renewal of nearly C$900 billion of residential mortgages starting next year will weigh on banks.

“Investor focus would be on potential for expanding net interest margins to offset slowing loan growth and rising credit costs,” BofA analyst Ebrahim Poonawala said.

Provision for credit losses (PCLs), the money banks set aside to cover bad loans, is expected to grow at least 39 per cent at National Bank and more than double at Bank of Montreal, which acquired U.S lender Bank of the West earlier this year.

Profits at the big six banks are expected to shrink an average 3% from a year ago as PCLs climb and revenue growth slows, KBW analyst Mike Rizvanovic projected. He lowered his forecast for fiscal year 2024 earnings.

“We continue to see a challenging environment for the group heading into fiscal 2024,” Rizvanovic said, noting that higher PCLs, a prolonged mortgage renewal cycle and the impact of high interest rates on consumer lending would curtail balance sheet growth.