Canadian banks set to release earnings reports

Toronto –

Canadian bank stocks have ridden a wave of investor optimism so far this year, but analysts say first-quarter results, which begin to arrive later this week, are a reminder of the complex economic landscape ahead. says that it will

On the positive side, there are signs of easing inflation and a surprising upturn in employment data. On the other hand, there is an increase in the amount of money that banks will have to set aside for the expected recession.

Scotiabank analyst Menny Grauman said investor concerns about capital requirements are starting to get closer to the question of how much money banks are making from rising interest rates.

“There is no question that the market’s almost idiosyncratic focus on margins has already begun to wane, as capital concerns have taken some of that spotlight,” he said in a note.

“A more difficult capital and regulatory environment for banks…is something we are very concerned about.”

The increase in capital requirements comes after banking regulators increased the amount of capital banks must hold, and the result also reflects two tax measures introduced by the federal government in last year’s budget.

Banks had until February 1 to raise their capital adequacy ratios to the new level of 11.5% set by the Financial Institutions Supervisory Authority. price.

With the economy looking solid despite a series of rate hikes, fears that the Bank of Canada won’t be able to cut rates anytime soon could add to the risks. Regulators could also raise interest rates further, prompting all of Canada’s largest banks to target his 12% capital adequacy ratio, Grauman said.

“Given the upward pressure on[bank capital]ratios, buybacks are as fashionable as top hats,” Grauman said.

In addition to higher capital requirements, banks are under pressure to increase loan loss reserves, which continue to rise from unusually low levels to more historic levels.

“Although a recession remains likely, we expect credit normalization to continue, supported by higher bad debt provisions,” Barclays analyst John Aiken said in a note. .

Banks need to prepare for the potential impact of higher central bank rates, but with overall lending activity still strong and net interest margins improving, banks can still benefit, Aiken said. says Mr.

“For now, despite the slowdown in the Canadian housing market, overall loan growth remains stable. On the capital markets side, investment bank league table data points to a relatively positive quarter. is showing.”

Canaccord Genuity analyst Scott Chan said the Big 6 stocks were up 10.7% as of Feb. 16, compared with 7.2% for the overall TSX Composite.

But the gains in equities came after the bank had relatively underperformed in 2022, he said, with softening capital markets and lower credit expectations lowering earnings expectations for the quarter.

The potential need for longer rate hikes to get the inflation job done is also a growing concern, he said.

“Recent discussions about ‘higher interest rates for longer’ in Canada and the US are fueling potential credit concerns,” he said in a note.

CIBC kicks off the earnings season on Friday, BMO and Scotiabank report on February 28th, and RBC, TD and National Bank announce results on March 1st.

This report by the Canadian Press was first published on February 22, 2023.

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