Canada expects credit growth
2022.11.27 10:40
Canada expects credit growth
Budrigannews.com – The choppy markets that affect wealth management and a slow deal pipeline that reduces income from investment banking offset expected gains from business loans in leading Canadian banks’ fourth-quarter profits.
A turbulent year that saw inflation reach decades-high levels and the Bank of Canada embark on a relentless campaign of monetary tightening concludes with the earnings reports, which begin on Tuesday.
Due to lower investment banking activity, the Big Six banks’ average profit is anticipated to decrease by 4% from the previous year.According to data from Refinitiv, mergers and acquisitions (M&A) saw a nearly 50 percent decrease to C$22.8 billion ($17 billion) in the three months ending September 30.
Financial backers have proactively set apart down bank stocks expecting a more vulnerable quarter, with the financial sub-file dropping 6.8% up to this point this year, contrasted and a 4.7% decrease in the more extensive benchmark.
Over C$63.5 billion in market capitalization has been lost by the Big Six since the Bank of Canada’s initial rate hike in March.
According to Credit Suisse analysts Joo Ho Kim and Amanda Abraham, “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 at the largest capital markets businesses, Royal Bank of Canada and Bank of Montreal, are anticipated to suffer the most.
However, there is disagreement among analysts regarding the impact of a slowing economy because some macro indicators continue to indicate robust loan demand.
Meny Grauman and Felix Fang of the Bank of Nova Scotia wrote in a note, “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.”
“We continue to believe that a defensive posturing remains appropriate” heading into fiscal 2023, they stated, adding that they anticipate that credit conditions will endure remarkably well.
The top six Canadian lenders’ net interest margins, a key indicator of how much money they make from lending, are expected to have increased by nearly 8 basis points from last year as a result of the central bank raising rates.
According to KBW analysts Abhilash Shashidharan and Mike Rizvanovic, “business lending was particularly strong and aided by strength in balances outside of Canada.”
Credit Suisse cited data from the Office of the Superintendent of Financial Institutions to claim that loans increased by 15% in the first two months of the quarter.
However, borrowers may be spooked into saving less and spending more if interest rates are raised too much, which can reduce loan demand. Higher borrowing costs eliminate potential homebuyers, obscuring what is typically a lucrative revenue stream for lenders. As a result, banks are having a difficult time navigating a downtrend in the housing market.
Nearly 65% of banks’ domestic loans are mortgages.
Analysts said that Canadian Imperial Bank of Commerce, the fourth-largest lender, will be hit harder than peers because more than half of its loans are domestic retail mortgages.
However, there are indications that the Bank of Canada may soon be coming to the end of its hawkish rate hike cycle, which could help stabilize the housing market and increase overall demand for credit.
At a time when investors are punishing stocks at the slightest indication of a crack in consumers’ financial health, banks’ bad debt provisions in the fourth quarter are expected to nearly triple from last year, and their 2023 forecast for the same will be a key focus.
Analysts at Cormark anticipate that Bank of Nova Scotia, which released reserves more quickly than its peers during the pandemic, will accelerate building back bad debt provisions as difficulties persist.
