Are Canada's big banks just playing it safe or is there more trouble ahead?
Are Canada’s big banks just taking their usual conservative approach or are there signs of more trouble ahead in the sector?
That’s a question on which analysts are divided after the five largest banks reported choppy but mostly well-received fourth-quarter financial results that included increased provisions for soured loans as well as cost cuts and staff reductions aimed at weathering any slowdown as consumers and businesses adjust to higher interest rates.
While some are chalking the quarter up to getting bad news out of the way as the economic forecast for 2024 darkens, others warn the increasing provisions point to a softening economy and regulatory landscape that will weigh on bank results in the coming year.
“We see potential downside risk to 2024 earnings expectations across the banks based on higher credit losses,” Paul Holden, a bank analyst at CIBC Capital Markets, wrote in a Nov. 30 note to clients.
Based on guidance from Royal Bank of Canada that day, Holden said “risks are skewed to higher PCLs (provisions for credit losses) given soft economic conditions.”
RBC, the country’s largest bank, beat analyst earnings expectations for the fourth quarter ended Oct. 31 due, in part, to its capital markets operations, but total provisions for credit losses rose to $720 million from $339 million a year earlier, even higher than the $699 million forecast by analysts.
RBC’s gross impaired loans of $3.7 billion were also up in the fourth quarter, climbing 13 per cent from the previous quarter and 68 per cent from the year-earlier period. However, the bank noted in its earnings report that the ratio of impaired loans remains below the historical average.
Maria-Gabriella Khoury, a senior director at Fitch Ratings Inc.,
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