Analysts and investors anticipate weaker quarter amid challenges to wealth management and investment banking businesses
As volatile markets impact wealth management and a sluggish transaction pipeline diminish revenue from investment banking and offset predicted increases from business lending, top Canadian banks are expected to report a decrease in fourth-quarter earnings.
Starting on Tuesday, earnings reports from the banks will bookend a turbulent year that saw inflation reach a level unseen in decades and the Bank of Canada launch a relentless campaign of monetary tightening, reported Reuters.
Due to decreased investment banking activity, the Big Six banks' profits are predicted to decline by 4% on average over the prior year.
According to Refinitiv statistics, mergers and acquisitions (M&A) decreased by over 50% to $22.8 billion (US$17 billion) in the three months that ended on September 30.
Canada’s banking sub-index has plummeted 6.8% so far this year, compared to a 4.7% dip in the wider benchmark, reflecting the fact that investors have already discounted bank stocks in anticipation of a poorer quarter.
The Big Six have seen their market capitalization decline by more than $63.5 billion since the Bank of Canada's first rate increase in March.
Credit Suisse analysts Joo Ho Kim and Amanda Abraham said, "The increased volatility and pressure on equity markets during the fiscal quarter suggest that we could see a continuation of the weaker underwriting revenue this quarter."
Profits are anticipated to suffer the most at Royal Bank of Canada and Bank of Montreal, which have the largest capital markets divisions.
Analysts disagree on the effects of a weakening economy, though, since several macro indicators still hint at strong credit demand.
"The bottom line is that those looking for proof of a recession in this latest batch of bank results will be sorely disappointed once again," said Meny Grauman and Felix Fang of the Bank of Nova Scotia in a note.
Grauman added that going into the fiscal year 2023, they continue to feel that a defensive stance is warranted, and that they anticipate the credit conditions to hold up amazingly well.
The top six Canadian lenders' net interest margin, a crucial indicator of how much banks make from lending, is anticipated to have climbed by almost 8 basis points from last year as a result of rate increases by the central bank.
However, raising rates too high might scare off consumers, causing them to spend less and save more, which lowers the demand for loans.
The housing market is in a downturn, and banks are having a difficult time navigating it as increased borrowing costs drive away prospective homeowners and dampen what would otherwise be a profitable revenue stream for lenders.
When investors are punishing equities at the first evidence of a breach in consumers' financial health, banks' fourth-quarter bad debt provisions are anticipated to nearly treble from last year, and their 2023 outlook for the same will be a primary focus.