Canadian banks will publish their quarterly earnings reports this week, offering an outlook of the country's banking situation ahead of a possible recession due to the tight monetary policy of the Bank of Canada (BoC).
Scotiabank will be the first bank to report its quarterly earnings, which cover three months ending October 31, on Tuesday. During that period, the central bank increased its benchmark interest rate twice to 3.75 percent. In the next rate-setting meeting on December 7, the BoC is expected to implement another rate increase.
After Scotiabank, National Bank and Royal Bank of Canada (RBC) are due to publish their reports on Wednesday. On Thursday, the Canadian Imperial Bank of Commerce (CIBC), the Bank of Montreal (BMO) and TD will publish theirs. Analysts do not expect HSBC’s Canadian division to publish its report due to its possible sale.
The Canadian central bank hikes interest rates to combat the country’s high-paced inflation at the risk of slowing down the economy too much that it can enter a recession.
Recession fears have made investors hold back from placing money in bank stocks. According to analysts, the earnings reports can provide insights into how banks have prepared for an expected economic slowdown in 2023.
Analysts suggested investors pay attention to the profits the banks gained from loans, measured by the net interest margin. Investors also need to look at the probability that some borrowers will not be able to pay the loans, measured by the size of funds banks have set aside for potential bad loans.
In the past few quarters, lending has become the more important core business for Canadian banks as recession fears cause a decrease in profits for other core businesses, including wealth management and capital markets.
The central bank’s monetary policy puts noticeable pressure on the equity market because investors mostly stay away from risky assets, although equities in Canada have reported significant gains. The policy also holds the real estate market back since the year-to-year home sales in October were down 36 percent.
Analysts, however, said banks had managed to profit from the rate hikes, as displayed by their net interest margins. National Bank insurance analyst Gabriel Dechaine explained that the growing margins can moderate “recession concerns.”
The reserves for potential bad loans involve complex accounting rules and constantly evolve. Analysts predicted they would increase this quarter, but it should not worsen concerns about credit conditions. Scotiabank managing director Meny Grauman even argued that banks’ credit situations remained “pristine.”
"The bottom line is that those looking for proof of a recession in this latest batch of bank results will be sorely disappointed once again,” Grauman added.
More hikes
BoC governor Tiff Macklem said the central bank needed to increase benchmark rates “a little bit further.” Despite that, Macklem could not confirm when the rate hikes would stop. He acknowledged, however, the action might feel “a bit counterintuitive” and that people are “frustrated.”
Macklem explained that Canada’s GDP would be near zero in the next few quarters until mid-2023. Although he assured that the economic slowdown should be brief and shallow, Macklem said there would be an economic impact, including a spike in the unemployment rate.
Centre for Future Work economist Jim Stanford said the BoC had hiked the rates too high within a short period. He compared the situation with the 1970s crisis, saying that, unlike in the previous crisis, wages today do not increase alongside living costs. The monetary strategy is, therefore, “inappropriate” for the current economy.