The report will focus on borrower stress
Canadian banks will begin to report third-quarter results on Friday with TD Bank group. The results will cover the three months to the end of July.
“Our key focus for the quarter will be on credit as pressure mounts from both commercial and personal banking customers,” said Canaccord Genuity analyst Matthew Lee in a note published by BNN Bloomberg.
The timing of the report overlaps with the first two Bank of Canada interest rate cuts that brought its key rate down half a percentage point to 4.5 per cent. This was matched by banks that dropped their prime rates to 6.7 per cent.
Despite the rate cuts, mortgage renewal rates remain significantly higher, posing ongoing challenges for those with variable-rate loans.
While banks describe the current credit environment as a return to pre-COVID levels, Lee mentioned that he will closely monitor whether bank provisions for loan losses suggest more difficulties ahead.
“Outside of commercial banking challenges, we are focused on the weakening Canadian consumer, particularly in the card and auto books,” he said.
The latest Bank of Canada survey of consumer expectations that was released last month showed financial stress has worsened from the first quarter. Reportedly, Canadians see a higher probability of missing debt payments or losing their jobs.
The central bank has also warned that mortgage payments are set to see increases next year and in 2026. However, many economists predict at least two additional rate cuts this year and another full percentage point cut next year.
Analysts also believe that various economic challenges, like high borrowing costs and a recession affecting consumer confidence, will likely exert downward pressure on loan growth, according to Jeffries analyst John Aiken.
“While the Bank of Canada continues on its easing monetary policy stance ... lending volumes could be challenged and stay modest over the near term.”
With loan growth subdued, attention will also shift to managing expenses. However, banks are expected to see some financial relief compared to last year when many incurred restructuring charges related to staffing cuts in anticipation of the economic slowdown.
Analysts are looking ahead to 2025, expecting a significant increase in loan growth as interest rates continue to decline. They also anticipate that banks will begin to reduce the substantial credit loss provisions they set aside due to default risks.
“While the impact of decreasing rates should be immaterial in Q3, we believe that the pull-forward of cuts make loan growth acceleration a more tenable possibility in the first half of (fiscal 2025),” said Lee.
While those provisions are expected to stay stable, National Bank analyst Gabriel Dechaine has a slightly more negative outlook heading into the quarter.
“These adjustments are justified simply by a general sense of conservatism, given rising insolvencies in Canada, potential commercial impairments and losses in some consumer categories,” he said in a note.
Dechaine however still sees banks achieving their soft landing through this tricky stretch.
“A sufficient level of rate cuts should allow Canadian banks to avoid a sharp uptick in loan losses, as we’ve seen in previous downturns.”
Toronto-Dominion Bank kicks off earnings on Aug. 22. The other major banks follow in the next week, with Scotiabank and BMO reporting Aug. 27, RBC and National Bank on Aug. 28, and CIBC wraps earnings on Aug. 29.
