What this week’s big bank earnings say about the state of Canada’s economy ahead of a possible recession
The most up-to-date earnings reviews from Canada’s huge banks are displaying indicators that the Canadian economic system is slowing down forward of a possible recession, with some indicators of optimism.
The Big Six banks – RBC, TD, CIBC, Scotiabank, BMO and National Bank – all launched their This fall 2022 reviews this week. Five out of the six noticed their income dip in comparison with final 12 months and three fell in need of their earnings expectations.
Michael Morrow, managing director of mergers and acquisitions and capital markets at monetary agency BDO Canada, says excessive inflation, decrease capital markets exercise and rising loan-loss provisions are all placing stress on the massive banks.
High inflation has meant increased working prices – together with increased staffing prices amid a decent labour market – that has lower into their margins, Morrow mentioned. Meanwhile, rising rates of interest and financial uncertainties have slowed funding and led to decrease capital markets exercise.
“Capital markets activity continues to be a drag on all of the banks, particularly those that have a higher concentration of capital markets activity versus regular retail-related activity,” Morrow mentioned.
RBC CEO Dave McKay mentioned on an earnings name on Wednesday the financial institution is bracing for a “brief and moderate recession.”
In anticipation of an financial downturn, the massive banks are additionally growing their loan-loss provisions, which refers to cash put aside to cowl unhealthy loans.
“As the bank’s worry about the economic performance of the Canadian economy, what that might mean is more loan losses going forward. And so their provisions every quarter has been creeping up, including this quarter,” Morrow mentioned.
“It’s definitely a leading indicator in terms of where we think the Canadian economy will be next year and where the where the risks lie.”
Loan-loss provisions particularly weighed closely on CIBC, which set provisions for credit score losses for the three-month interval of $436 million, up from $78 million in the identical quarter final 12 months. CIBC missed its earnings expectations by over 19 per cent.
“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 CEO Victor Dodig on an earnings name on Thursday.
“In response to these headwinds … we are going to continue to take actions to reposition our business to adjust to these new realities, but also continue to grow our client franchise and moderate our expense growth.”
But regardless of these so-called headwinds, Morrow believes there may be nonetheless good news to be gleaned from these outcomes. Most of the Big Six are growing their dividend charges for shareholders, which Morrow says “provides us with a view of confidence in the stability of the banks and their earnings profile.”
“If they’re increasing dividend rates, then that’s certainly an indication that they feel that the business and their capital ratios are going to be able to not only withstand this downturn, but continue to thrive through the year, through the back half of next year,” he defined.
On high of that, RBC introduced it might be taking up HSBC’s Canadian operations in a $13.5 billion deal, pending regulatory approval. Morrow says he sees the acquisition as a “positive vote of confidence for the Canadian economy,” particularly given the truth that RBC is paying a premium worth for the acquisition. The financial institution is paying 9.4 instances HSBC Canada’s 2024 adjusted earnings.
“Certainly, you know, it gleans to the confidence that RBC has within the within the Canadian lending market. And if there were certain doubts in the Canadian market, you wouldn’t see these participants paying premiums in the marketplace at this point in the cycle,” he mentioned.
With information from The Canadian Press and Reuters
