Uncertainty over Bank of Canada interest rate cut dragging on Big Six, say analysts
Uncertainty over how long interest rates will remain elevated is posing a risk to growth and credit quality at Canada’s big banks, according to analysts who will be keeping an eye on those metrics when quarterly earnings are released this week.
Bank of America securities research analysts said higher rates could serve as an overhang on stock valuations, with the potential downside to earnings acting as a drag.
The five-year government bond yield, a key benchmark for mortgage pricing for around 45 per cent of loans, is above the levels it was trading at in late November, when banks reported the last quarterly results, wrote BofA analysts Ebrahim Poonawala, Gabriel Angelini, Isiah Austin and Brandon Berman.
The problem could get worse if the job market deteriorates, they said, noting that economists are forecasting that the unemployment rate could reach 6.5 per cent by year-end 2024, up from the current 5.8 per cent and pre-pandemic 5.7 per cent.
National Bank industry analyst Gabriel Dechaine, meanwhile, said there are low expectations heading into the quarter as the “Big Six” bank stocks have underperformed the market by nearly 300 basis points early into 2024.
“Shifting rate cut expectations have been a primary drag on performance,” Dechaine wrote in a note to clients.
He added that commentary from bank management teams since the start of the year has been generally cautious.
While most banks delivered stable or rising net interest margins to end fiscal 2023, Dechaine said he expects flat sequential net interest margin performance from the Big Six this quarter.
That’s largely due to deposit growth still being heavily skewed toward higher cost term deposits and a likely deceleration of higher margin commercial lending,
Read more on financialpost.com
