Preview: Canadian banks' credit quality in focus as Q3 bad loan provisions seen up

First Horizon

21/08/2024 11:00

By Nivedita Balu
       TORONTO, Aug 21 (Reuters) - Canada's big six banks will
probably set aside a total of C$4.5 billion in loan loss
provisions in the third quarter, analysts predicted, up nearly
27% from a year ago, as insolvencies rise and lenders prepare
for credit card and other delinquencies in a challenging
economy.
    The banks, which control a big chunk of the country's
banking market share, could feel the brunt of elevated borrowing
costs, slowing employment and possibility of a recession
weighing on consumer and business sentiment.
    "Third-quarter results are likely to reflect a challenged
Canadian economy, with banks expected to report sluggish loan
growth, while credit costs creep higher," BofA Securities
analyst Ebrahim Poonawala said.
    Overall, the TSX banking index's  .SPTTFS  8.3% growth so
far this year has underperformed the broader TSX index's
 .GSPTSE  10% gain.
    The benefits of Bank of Canada's two rate cuts this year on
deposit costs and interest expense are unlikely to be fully
reflected in the third quarter, but with mortgage renewals
around the corner, three upcoming rate cuts could help ease
pressure on credit in the second half of the year. 
    "With the Bank of Canada being more aggressive than
anticipated on rate cuts, we are more concerned about the
near-term outlook... there will need to be much
stronger-than-anticipated earnings to fuel support for the
banks," Jefferies analyst John Aiken said. 
    
    US OPERATIONS IN FOCUS  
    Eyes will be on TD Bank  TD.TO  on Thursday, the first bank
to report third-quarter results as investors await details of
the U.S Department of Justice's investigation into deficiencies
in its anti-money laundering program.
    TD, which has made a big push into the U.S. over the years
through acquisitions, has said it would grow in the region
organically through building new branches after its proposal to
buy First Horizon failed and the probe has led to a pause in its
expansion plan.
    Bank of Montreal  BMO.TO  is also expected to show a rise in
loan loss provisions due to a potential loss on a loan to U.S.
solar company SunPower.
    "The overhang related to its credit performance, sluggish
loan growth and U.S. exposure in general will likely persist
until after the November U.S. election and the Fed begins to
shift towards a rate cutting cycle," National Bank analyst
Gabriel Dechaine said. "Patience is required," he noted. 
    Loan loss provisions are expected to rise at five of the six
banks between 28.4% and 45%, while CIBC is forecast to see a
reversal of its loan loss provision, according to LSEG data.

 (Reporting by Nivedita Balu in Toronto; Editing by David
Gregorio)
 ((Nivedita.Balu@thomsonreuters.com; X: @niveditabalu;))