Canadian banks face Q1: 11% earnings dip expected amid market strains

Earnings season starts with cautious optimism in the Canadian banking sector, facing slow loan growth and regulatory changes

Canadian banks face Q1: 11% earnings dip expected amid market strains

As the first quarter of 2024 approaches, the Canadian banking sector, amidst an environment of international stock markets reaching record highs, presents a more subdued picture.  

According to The Canadian Press, Canadian bank shares have not shown considerable momentum as they prepare for their first-quarter earnings results, in contrast to the global trend.   

Analysts attribute the sector's lackluster performance to several factors, including sluggish loan growth, risks in current loan portfolios, and changes in regulatory elements such as tax exemptions and capital requirements.  

Despite these challenges, there is a sense of easing concerns, though a significant turnaround is not imminent.   

Meny Grauman, an analyst at Scotiabank, expresses a shift in perspective, stating, “After many quarters of bearishness, we are getting much more constructive on the outlook for Canadian banks.”  

However, Grauman tempers this optimism by noting that tangible improvements are expected only around fiscal 2025, citing slow loan growth in the US and the impact of the elimination of a tax deduction on dividend income from Canadian businesses.  

Grauman predicts that earnings for the first quarter might be six percent higher than the last quarter but will likely be about 11 percent below the same quarter of the previous year.   

Carl De Souza, sector lead of North American financial institutions at Morningstar DBRS, highlights the continued increase in provisions for credit losses, especially in the commercial real estate sector, as a significant factor impacting the banks' performance.  

De Souza notes, “We definitely think they're going to be negatively impacted by a continued ramp-up in provisions for credit losses as the credit normalization continues.”  

He adds that while residential real estate is not a major concern, commercial real estate, particularly the US office market, is experiencing strain.   

Despite these challenges, Canadian banks are seen as resilient and capable of managing these pressures. De Souza assures, “There will be a little bit of pain there, but it should be manageable.”   

National Bank analyst Gabriel Dechaine offers a slightly more optimistic view of the loan portfolios, stating, “Aside from a few pockets of weakness (e.g., commercial real estate) the credit picture has been a benign one.”  

He anticipates significant improvement in expenses following major layoffs last year, although he does not expect these benefits to reflect in the first quarter.   

In terms of profits, Dechaine forecasts that the margins banks earn on interest are likely to expand, but this will not materialize until the latter half of the year.  

This forecast, coupled with cautious commentary from management, is a contributing factor to the Big Six bank stocks underperforming the market by nearly three percentage points in early 2024.   

The broader economic landscape offers some solace, with the inflation rate showing an encouraging slowdown to 2.9 percent last month. The housing market demonstrates resilience, with a 22 percent increase in home sales in January compared to the previous year, and the unemployment rate in Canada has fallen to 5.7 percent. 

Grauman comments on the real estate sector, “We are increasingly convinced in the resiliency of the Canadian housing market, even in the face of the coming mortgage renewal wave.”   

Senior equity research analyst James Shanahan from Edward Jones perceives the quarter as one marked by low expectations. He believes that the more alarmist views on credit, especially regarding housing, are somewhat exaggerated.  

However, Shanahan does anticipate a grim outlook for loan growth. He sees potential in capital markets activities as a catalyst for earnings growth, saying, “We're still hopeful that a recovery in capital markets activity, particularly (initial public offerings) and (M&A), could be a strong catalyst for earnings growth for the Canadian Banks.”   

The earnings season is set to begin with Scotiabank and BMO, followed by RBC and National Bank, and concluding with CIBC and TD Bank