How Canada’s banks are preparing for an economic downturn

TORONTO –

From boosting money available to slicing workers, Canadian banks are taking quite a lot of methods to organize for a extensively anticipated financial slowdown within the 12 months forward.

Banks outlined a few of their approaches of their fourth quarter outcomes this week, which noticed executives strike notes of warning due to the number of financial pressures, whereas nonetheless committing to a push for progress.

“As we look ahead to 2023, global economic growth is expected to be slower as central banks continue with their monetary policy tightening to tame inflation,” mentioned CIBC chief govt Victor Dodig on an earnings name.

“In response to these headwinds … we are going to continue to take actions to reposition our business to adjust to these new realities.”

Expenses jumped for CIBC within the quarter partially from severance prices because it “repositioned the business” for the altering outlook, mentioned chief monetary officer Hratch Panossian.

RBC, which introduced a $13.5-billion deal to purchase HSBC Bank Canada this week, mentioned it was rolling out a two per cent low cost to its dividend reinvestment plan, a transfer meant to spice up capital and which the financial institution expects so as to add about $2 billion to its coffers.

The bid to spice up capital is a part of a conservative method amid increased threat of unlikely however extreme financial occasions, introduced on partially by important geopolitical instability, mentioned chief govt Dave McKay on an earnings name.

“You have higher tail risk right now,” mentioned McKay. “And therefore, we’re building a little bit of a capital buffer for uncertainty.”

BMO, which expects to shortly shut its US$16.3 billion acquisition of Bank of the West that can put some stress on its capital buffers, mentioned it’s utilizing related threat switch transactions to what it has been doing lately, together with mortgage syndication and artificial securitization.

“We’ll continue to dynamically manage our capital and resources,” mentioned chief govt Darryl White. “We do see a little bit of slowing down.”

BMO’s chief monetary officer Tayfun Tuzun mentioned the financial institution is up to now not slicing again on any business segments due to uncertainty.

“We had very strong loan growth during the quarter. Obviously, that should be a proof that we’re still doing all the business with our clients that we have,” he mentioned on their earnings name.

TD has a “downturn readiness playbook” that it continues to replace, however for now it is extra targeted on progress, mentioned chief monetary officer Kelvin Tran in an interview.

“You have to invest for growth, and in a potential downturn, you’re just more selective on what you invest. But it is important to drive growth.”

He mentioned the financial institution, which noticed bills up about 10 per cent within the quarter from final 12 months, is investing to be prepared for purchasers within the uncertainty forward.

“We’re putting more bankers on the street, more advisors on the street to help our customers as you know, it’s a very challenging environment and want to be there for them.”

Scotiabank’s chief threat officer Phil Thomas mentioned that the financial institution’s efforts to de-risk its portfolio have positioned it nicely to handle financial uncertainties, whereas chief govt Brian Porter mentioned he expects fee stress to quickly ease.

“Central banks in Canada and the United States appear to be nearing the end of their tightening cycles as inflation finally appears to be slowing. In Canada, the economic growth is moderating, but economic levels of activity remained robust.”

While some banks are extra optimistic than others on the financial outlook, they did all increase what they’re setting apart for potential mortgage losses. There was a variety in provisions, from $617 million at TD on the highest finish to $226 million at BMO, with variances coming from portfolio dimension, outlook, and different elements.

RBC added $381 million to provisions, together with $126 million on performing loans, as its sees financial bother coming a bit quicker and extra intense than earlier than, mentioned chief threat officer Graeme Hepworth.

“Provisions on performing loans this quarter reflect changes to our base case scenario. This incorporated an earlier and modestly more severe recession than previously expected.”

This report by The Canadian Press was first printed Dec. 1, 2022.