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Economy

Banks had a lot to say about the economy this week: It’s complicated

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Though bank executives had lots to say about the economy during earnings calls with analysts, there was no definitive take.Andrew Vaughan/The Canadian Press

After Canadian banks finished reporting their latest quarterly financial results this week, investors hoping for some clarity on the economy may have come away disappointed. No clarity here, which could limit the recovery in bank stocks.

The banking sector is meandering between two very different outlooks: mild optimism that a recession will be brief or avoided altogether, while lending activity holds up and borrowers pay off their loans; and simmering pessimism that rising interest rates will wallop economic activity, pushing bank loan losses sharply higher.

Reflecting the optimistic take, bank stocks have risen by an encouraging 8 per cent this year, on average. Then again, pessimists will point out that these stocks are down more than 14 per cent since the start of 2022.

Though bank executives had lots to say about the economy during earnings calls with analysts, offering valuable insights given the banks’ unique perspective on lending activities and consumer indebtedness, there was no definitive take.

Dave McKay, Royal Bank of Canada’s RY-T chief executive officer, said during an earnings call that the bank is forecasting a “softer landing, characterized by a modest recession” – which sounds like a good reason to buy bank stocks right now.

But Mr. McKay also said that banks were operating within a “complex and fluctuating macro and market environment,” characterized by stubbornly high inflation, labour shortages, geopolitical shocks and the lagging impact of central bank interest rate hikes.

Ugh. And if actions speak louder than words, then the banking sector’s reaction to rising borrowing costs and slowing economic activity merely added to the murky backdrop for investors.

The banks set aside more money in their fiscal first quarter to handle the prospect of defaults: The Big Six banks collectively reported nearly $2.5-billion in provisions for credit losses – or PCLs in banking jargon – up from a net $373-million in provisions in the same period a year ago, when some banks were booking recoveries from previous provisions.

The spike in provisions supports the bearish case against bank stocks, but there was an upbeat context here: Provisions were actually lower than what most analysts had been expecting, and executives framed the increase as a step toward historically normal losses after a period of unusually low losses a year ago.

“This is indicating that credit is deteriorating and we’re still not at historical averages. But the question becomes: Will PCLs just stop there or will they overshoot?” John Aiken, an analyst at Barclays, said in an interview.

“This is where both the bulls and the bears can look at the PCLs this quarter, and it can bolster their case,” Mr. Aiken added.

It’s little wonder, then, that bank stocks are also sending conflicting signals about whether this economically sensitive sector is in the midst of a further recovery or poised for another downturn.

Bank-stock valuations are slightly below the historical average, based on estimated price-to-earnings ratios. According to Gabriel Dechaine, an analyst at National Bank Financial, the discount was 8 per cent as of market close on Thursday.

But this discount is considerably narrower than it was at the start of the year, before stock prices rebounded. Valuations are no longer particularly cheap in the face of economic risks – suggesting that the collective wisdom of the market can’t figure out whether the sector should be avoided on fears that the economy is in trouble, or scooped up on hopes that central banks have beaten inflation.

Specific stocks within the sector reflect similar bafflement.

CIBC CM-T is leading the way among the Big Six bank stocks in 2023, with gains of nearly 15 per cent. The bank has a relatively large exposure to the domestic mortgage market, making the stock sensitive to economic data. The stock’s outsized gains this year suggest some investors are betting on a healthy economy.

But wait a minute: Over the past year, CIBC is near the bottom of the pack with a decline of more than 21 per cent. Compare that with RBC – a bigger and more diversified bank, making it a safer bet during economic uncertainty: The stock is down less than 2 per cent over the past year. RBC’s outperformance suggests that investors are still nervous.

The one thing that just about everyone can agree on? If the banking sector’s financial results were supposed to give investors a clearer view of the year ahead, they failed to deliver.

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Economy

B.C.’s debt and deficit forecast to rise as the provincial election nears

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VICTORIA – British Columbia is forecasting a record budget deficit and a rising debt of almost $129 billion less than two weeks before the start of a provincial election campaign where economic stability and future progress are expected to be major issues.

Finance Minister Katrine Conroy, who has announced her retirement and will not seek re-election in the Oct. 19 vote, said Tuesday her final budget update as minister predicts a deficit of $8.9 billion, up $1.1 billion from a forecast she made earlier this year.

Conroy said she acknowledges “challenges” facing B.C., including three consecutive deficit budgets, but expected improved economic growth where the province will start to “turn a corner.”

The $8.9 billion deficit forecast for 2024-2025 is followed by annual deficit projections of $6.7 billion and $6.1 billion in 2026-2027, Conroy said at a news conference outlining the government’s first quarterly financial update.

Conroy said lower corporate income tax and natural resource revenues and the increased cost of fighting wildfires have had some of the largest impacts on the budget.

“I want to acknowledge the economic uncertainties,” she said. “While global inflation is showing signs of easing and we’ve seen cuts to the Bank of Canada interest rates, we know that the challenges are not over.”

Conroy said wildfire response costs are expected to total $886 million this year, more than $650 million higher than originally forecast.

Corporate income tax revenue is forecast to be $638 million lower as a result of federal government updates and natural resource revenues are down $299 million due to lower prices for natural gas, lumber and electricity, she said.

Debt-servicing costs are also forecast to be $344 million higher due to the larger debt balance, the current interest rate and accelerated borrowing to ensure services and capital projects are maintained through the province’s election period, said Conroy.

B.C.’s economic growth is expected to strengthen over the next three years, but the timing of a return to a balanced budget will fall to another minister, said Conroy, who was addressing what likely would be her last news conference as Minister of Finance.

The election is expected to be called on Sept. 21, with the vote set for Oct. 19.

“While we are a strong province, people are facing challenges,” she said. “We have never shied away from taking those challenges head on, because we want to keep British Columbians secure and help them build good lives now and for the long term. With the investments we’re making and the actions we’re taking to support people and build a stronger economy, we’ve started to turn a corner.”

Premier David Eby said before the fiscal forecast was released Tuesday that the New Democrat government remains committed to providing services and supports for people in British Columbia and cuts are not on his agenda.

Eby said people have been hurt by high interest costs and the province is facing budget pressures connected to low resource prices, high wildfire costs and struggling global economies.

The premier said that now is not the time to reduce supports and services for people.

Last month’s year-end report for the 2023-2024 budget saw the province post a budget deficit of $5.035 billion, down from the previous forecast of $5.9 billion.

Eby said he expects government financial priorities to become a major issue during the upcoming election, with the NDP pledging to continue to fund services and the B.C. Conservatives looking to make cuts.

This report by The Canadian Press was first published Sept. 10, 2024.

Note to readers: This is a corrected story. A previous version said the debt would be going up to more than $129 billion. In fact, it will be almost $129 billion.

The Canadian Press. All rights reserved.

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Economy

Mark Carney mum on carbon-tax advice, future in politics at Liberal retreat

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NANAIMO, B.C. – Former Bank of Canada governor Mark Carney says he’ll be advising the Liberal party to flip some the challenges posed by an increasingly divided and dangerous world into an economic opportunity for Canada.

But he won’t say what his specific advice will be on economic issues that are politically divisive in Canada, like the carbon tax.

He presented his vision for the Liberals’ economic policy at the party’s caucus retreat in Nanaimo, B.C. today, after he agreed to help the party prepare for the next election as chair of a Liberal task force on economic growth.

Carney has been touted as a possible leadership contender to replace Justin Trudeau, who has said he has tried to coax Carney into politics for years.

Carney says if the prime minister asks him to do something he will do it to the best of his ability, but won’t elaborate on whether the new adviser role could lead to him adding his name to a ballot in the next election.

Finance Minister Chrystia Freeland says she has been taking advice from Carney for years, and that his new position won’t infringe on her role.

This report by The Canadian Press was first published Sept. 10, 2024.

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Economy

Nova Scotia bill would kick-start offshore wind industry without approval from Ottawa

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HALIFAX – The Nova Scotia government has introduced a bill that would kick-start the province’s offshore wind industry without federal approval.

Natural Resources Minister Tory Rushton says amendments within a new omnibus bill introduced today will help ensure Nova Scotia meets its goal of launching a first call for offshore wind bids next year.

The province wants to offer project licences by 2030 to develop a total of five gigawatts of power from offshore wind.

Rushton says normally the province would wait for the federal government to adopt legislation establishing a wind industry off Canada’s East Coast, but that process has been “progressing slowly.”

Federal legislation that would enable the development of offshore wind farms in Nova Scotia and Newfoundland and Labrador has passed through the first and second reading in the Senate, and is currently under consideration in committee.

Rushton says the Nova Scotia bill mirrors the federal legislation and would prevent the province’s offshore wind industry from being held up in Ottawa.

This report by The Canadian Press was first published Sept. 10, 2024.

The Canadian Press. All rights reserved.

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