Canadian banks will release their quarterly financial results next week at a time when many experts say they see signs of a possible recession on the horizon.
Experts’ fears of the economy shrinking appear to have kept banks’ share prices from inflating in equity markets.
Analysts will examine how the banking sector is performing on the eve of a possible economic slowdown.
The results cover the three-month period ending October 31. The Bank of Canada has twice increased its policy rate to raise it to 3.75% during this period.
Analysts will wonder how much banks have taken advantage of the lending situation. Another question: will the borrowers be able to repay them? Part of the answer will lie in the provisions set aside by banks to deal with bad loans.
The lending sector has gained importance in recent quarters due to the sharp decline in equity markets. This resulted in lower profits for the investment management industry. The capital sector has seen a decline, but seems to be recovering.
Rising interest rates have been a major source of pressure for equities, although some good gains were made in November. It caused a slowdown in the real estate and mortgage markets. For example, home sales fell 36% in October compared to the same period a year earlier. However, the banks were also able to benefit, as evidenced by their net interest margins.
“Rising margins are one of the most exciting developments in banking. It partially offset fears of the recession,” wrote National Bank analyst Gabriel Dechaine.
Provisions for bad loans will also be an element that can make the difference, underlines Meny Frauman, of Scotiabank.
Banks’ financial reserves began to recover in the previous quarter, after a long period of decline. They will increase again during this quarter, but this is not a sign of concern for the credit sector which remains, according to Mr. Grauman, “in good health”.
“The main thing is that those who seek to demonstrate that we are in recession in the next results of the banks will once again be bitterly disappointed,” he says.
He cited the latest employment results which seem to indicate a recovery after a slow summer. Another positive sign: rising wages, which could also help the economy and the banks.
Analysts also hope to take the opportunity to find out how the banks see the future.
“When we’re at the end of the year, it’s usually a good time for advice. Have interest margins peaked? Are they close to reaching it? Has loan growth peaked? How much will provisions for bad loans be increased? asks Darko Mihelic.
This forecasts a slight drop in earnings per share compared to the third quarter, but it will be up compared to the same period of the previous year. He recalls that the commercial lending sector remained solid. For next year, Mr. Mihelic wants to be conservative in forecasting growth in earnings per share of 2.2%. It is counting on a 4.4% rise in 2024 due to loan growth and other stabilizing factors.
One question will probably remain unanswered: who will buy the Canadian division of HSBC? This transaction could amount to around $10 billion. The company announced in early October that it was reviewing its strategic options for its wholly-owned subsidiary in Canada, while noting that the review was still in its early stages.
“We don’t expect to be able to discuss HSNC during the conference calls. But the question will remain on the lips. This transaction will have significant implications for the company that enters into it,” said Mr. Grauman.
Scotiabank will get the ball rolling on Tuesday. It will be followed the next day by the Royal Bank and the National Bank. On Thursday, it will be the turn of the Bank of Montreal, CIBC and Toronto-Dominion to present their financial results.