Canadian banks to provide financial update in Q4 results ahead of possible recession

Canadian banks are set to reveal how they're faring in the lead up to a possible recession as they report quarterly earnings this week.

Canadian banks are set to reveal how they’re faring in the lead up to a possible recession as they report quarterly earnings this week.

As central banks raise interest rates to slow inflation, economic fears have held bank stocks back compared with the overall market, so analysts will be looking to see how well set up the sector is before an expected slowdown next year.

Starting with Scotiabank reporting on Tuesday, the results will cover the three months ending Oct. 31. During that period, the Bank of Canada raised its key interest rate twice, bringing its key interest rate to 3.75 per cent. The central bank is expected to hike rates again at its last decision of the year on Dec. 7.

Key questions for analysts will be on how much banks are profiting from their loans, measured in one way by the net interest margin, and what the chances are that some won’t be able to pay those loans back, measured by how much money banks are setting aside for potentially bad loans.

The core business of lending has become more important in recent quarters as the hit to the stock market has led to a retreat in profits for the wealth management side while the capital markets business of raising money for companies has also slowed over economic concerns but is starting to pick up.

Rising interest rates have been a major source of pressure for equities, though November has so far shown good gains. Interest rates have also slowed the real estate market and mortgage demand, with home sales down 36 per cent in October compared with a year earlier, but banks have also been able to profit from those rising rates as shown by their net interest margins.

“Margin expansion has been one of the more exciting developments in the banking space, partially offsetting recessionary concerns,” said National Bank analyst Gabriel Dechaine in a note.

Provisions on potentially bad loans will be another differentiator, especially since complex accounting rules make the measures an ongoing source of variable versus analyst consensus, said Scotiabank analyst Meny Grauman in a note.