What Investors Need to Know Ahead of Big Canadian Banks Earnings Reports?

The Canadian banking sector demonstrated resilience during the third quarter of 2024, despite economic challenges such as high interest rates and broader market pressures. RBC stood out with a remarkable performance, reporting a third-quarter profit of $4.49 billion, an increase from $3.86 billion a year earlier. This growth was partly bolstered by $239 million from the HSBC Canada acquisition completed in March.

In the last quarter, the capital positions of Canada's Big Five Banks remained robust, with an average Common Equity Tier 1 (CET1) capital ratio of 13%, significantly exceeding regulatory requirements and reflecting their financial stability.

However, there was a significant rise in provisions for credit losses among major banks. BMO and Scotiabank, in particular, reported substantial increases in provisions for credit losses, totaling $906 million (an 84.15% YoY increase) and $1.05 billion (a 28.45% YoY increase), respectively. BMO experienced increased impaired provisions in consumer loans, credit cards, and business and government loans. Meanwhile, Scotiabank attributed this increase to higher impaired provisions in its international business, Canadian auto loans, and unsecured lines of credit.

As approaching the earnings announcements, investors might concentrate on the following key aspects:

Investors are closely watching the provisions for credit losses (PCLs) of these Canadian banks, as they have generally increased this year due to high interest rates impacting financially strained consumers and businesses. Mario Mendonca, managing director and bank analyst at TD Cowen, anticipated a more cautious outlook on credit losses in the upcoming reports due to the softened economic environment, as well as highlighted that the weakness is primarily coming from the Canadian consumer, specifically in unsecured credit areas such as credit cards, auto loans, and some lines of credit.

BMO is expected to see a 13.74% decrease in earnings per share (EPS) for the fourth quarter, as the bank's plan to expand credit provisions over several quarters could negatively impact its earnings. Meanwhile, Scotiabank's loan provisions are projected to remain elevated in the fourth quarter, exceeding C$1 billion, yet aligning with the implied guidance of 55 basis points. Analysts noted that the outlook for Scotiabank's provisions is relatively stable.

In the third quarter, CIBC experienced improved earnings, largely driven by a significant 34.38% YoY reduction in their provisions for credit losses. Analysts anticipate that this trend of improved loan growth will continue into the fourth quarter and extend to 2025. However, the pace of acceleration in the fourth quarter may be modest, with consumer and commercial loans likely expanding only marginally.

The Office of the Superintendent of Financial Institutions (OSFI) has underscored the critical importance of robust culture risk management, issuing a regulatory notice that delineates the responsibilities of boards and senior managers in eradicating behaviors that could undermine a financial institution's safety, soundness, integrity, and security. Toronto-Dominion Bank, in particular, faces challenges due to money laundering issues, resulting in a US$3.1 billion fine from U.S. authorities and growth restrictions on its U.S. operations. These issues have spurred management changes and raised questions about TD's growth prospects for 2025 and beyond.

Canadian banks are navigating the impacts of significant interest rate cuts by the Bank of Canada, which has reduced rates by 125 basis points since June, with potential for more cuts by year-end. This action has eased the pressure on banks' net interest margins as the yield curve inversion has subsided. The changes in the yield curve suggest a moderation in funding-cost pressures, which may benefit banks like Toronto-Dominion, CIBC, and Scotiabank that are heavily reliant on interest income, while Royal Bank of Canada and Bank of Montreal continue to depend more on fee-based revenue.

Despite the Bank of Canada's accelerated rate cuts, challenges still remain with loan and credit card delinquencies. Serious mortgage delinquencies in Canadian banks' covered-bond pools rose by 2 basis points YoY in September. Loans over 90 days late have increased, especially at BMO and RBC. The credit quality of covered-bond pools at the nation's banks is gradually deteriorating, with loan repricing risks for 2025-26 still looming.

Card-delinquency rates at Canada's leading banks are on the rise and may continue to increase, as the effects of rate cuts take time to materialize and consumers remain weighed down by debt. Among the Big Five Banks, BMO leads the increases (53 bps), followed by RBC (34 bps) and TD (24 bps), while CIBC is aided by its pool expansion.

Donald Trump's return to Washington carries significant implications for Canadian banks, particularly institutions like BMO and TD that rely heavily on their U.S. subsidiaries for profits. Trump's plans for corporate tax cuts and reshoring could bolster these banks, improving their profitability and market positioning. However, his proposed 25 percent tariff presents risks to the Canadian economy, raising concerns among investors who are eager to see how Canadian banks plan to tackle these challenges. Furthermore, Trump's presidency might affect Canada's implementation of the Basel III reforms. As Canada leads in implementing these international banking standards, any divergence in policy by the U.S. could necessitate a reevaluation of Canada's capital rules. Overall, while Trump's economic policies might present growth opportunities for Canadian banks, they also introduce uncertainties that demand careful strategic planning.

Sources: Bloomberg, Financial Post, the Globe and Mail