Big Six banks still face credit headwinds, but aren't heading for a ‘cliff,’ analysts say

financialpost.com:

Canada’s top banks may still be facing credit headwinds, but analysts say that the relatively stable earnings display in the last quarter suggests that they are not going to “fall off the cliff” anytime soon.

The Big Six lenders, which dominate the market, this week reported financial results for a quarter that was once again dominated by questions about the amount of money they were keeping aside for loans that might go bad.

Provisions for credit losses, or PCLs for short, have been increasing at the big lenders as interest rates were rising, pinching the finances of indebted consumers and businesses alike. But analysts say that the banks’ ability to produce solid earnings despite tighter monetary conditions was a big positive.

“The banks are able to earn through these high provisions even in a very challenging economy,” said Jefferies Financial Group Inc. analyst John Aiken. “While not the best of quarters, we are actually quite pleased with the (banking sector’s) earning stability…. This bolsters the outlook as long as we can get a bit of a soft landing in the economy given the rate cuts.”

Four out of the big six lenders reported lower-than-expected PCLs for the period ending July 31.

This was a “positive surprise,” wrote National Bank of Canada analyst Gabriel Dechaine, in a note on Thursday. The banks with the largest positive deviations were Canadian Imperial Bank of Commerce and the Royal Bank of Canada, reflecting an improvement in their wholesale portfolios, he said.

Aiken echoed the sentiment, noting that the pace of provisions wasn’t increasing “precipitously” and that the banks were “very stringently” controlling costs. While it’s still early days, he added that there were “signs of life” in the lending arena