Are Canada’s big banks just taking their usual conservative approach or are there signs of more trouble ahead in the sector?
That’s a question on which analysts are divided after the five largest banks reported choppy but mostly well-received fourth-quarter financial results that included increased provisions for soured loans as well as cost cuts and staff reductions aimed at weathering any slowdown as consumers and businesses adjust to higher interest rates.
“We see potential downside risk to 2024 earnings expectations across the banks based on higher credit losses,” Paul Holden, a bank analyst at CIBC Capital Markets, wrote in a Nov. 30 note to clients.
Based on guidance from Royal Bank of Canada that day, Holden said “risks are skewed to higher PCLs (provisions for credit losses) given soft economic conditions.”
RBC, the country’s largest bank, beat analyst earnings expectations for the fourth quarter ended Oct. 31 due, in part, to its capital markets operations, but total provisions for credit losses rose to $720 million from $339 million a year earlier, even higher than the $699 million forecast by analysts.
RBC’s gross impaired loans of $3.7 billion were also up in the fourth quarter, climbing 13 per cent from the previous quarter and 68 per cent from the year-earlier period. However, the bank noted in its earnings report that the ratio of impaired loans remains below the historical average.
Maria-Gabriella Khoury, a senior director at Fitch Ratings Inc., said she views the Canadian banks’ treatment of the loans on their books as conservative, noting that they come at a time when consumer loan defaults in Canada remain below pre-pandemic levels. This is due in part to savings built up as a result of COVID-19 pandemic-related government aid in addition to reined in spending, she said in an interview.
Khoury said it was also noteworthy that a portion of the provisions taken by the banks represents performing rather than impaired loans, meaning borrowers are continuing to pay them back. And provisions can be reversed if the loans perform better than expected in the coming months.
In the case of Bank of Nova Scotia, which doesn’t have a large presence in the United States like some of its peers, overall provisions for credit losses rose to $1.26 billion in the fourth quarter from $529 million a year earlier, but a large share of those loans were in the performing bucket — $454 million, almost evenly split between retail and commercial loans.
“These loans are technically still performing,” Khoury said “But the macro outlook says that these could potentially in 2024 or 2025 go impaired, so they’re taking the provision (now).”
“If you’re looking at the U.S. operations, it’s (provisioning) more on the impaired versus the performing side. Those are loans that have already gone impaired, and that’s in line with our thinking that the U.S. consumers are going to feel the crunch before the Canadian consumer,” Koury said.
Provisioning by banks in their commercial lending portfolios isn’t focused on one particular sector, but signs of stress in commercial real estate in the U.S. were visible in the fourth-quarter report posted by Canadian Imperial Bank of Commerce on Nov. 30. CIBC reported a 14 per cent increase in gross impaired loans in the fourth quarter, with 60 per cent of the new impairments coming from the bank’s commercial real estate portfolio.
National Bank analyst Gabriel Dechaine said the impairments in CIBC’s commercial real estate portfolio were primarily tied to the U.S., where office property has been hit particularly hard, but in a note to clients he said a 40 per cent drop in commercial real estate maturities will improve the picture for CIBC in 2024.
Toronto-Dominion Bank said Nov. 30 it would cut 3,000 jobs, or three per cent of its workforce, taking a $363-million restructuring charge in the fourth quarter. CIBC has also been cutting this year, reducing staff by as much as five per cent. Royal Bank and Bank of Nova Scotia have also announced cuts.
“They all went on a hiring spree during the pandemic, so this was expected, and basically they’re all just positioning themselves for a muted 2024,” Khoury said.
As the year comes to a close, there is also regulatory uncertainty for Canadian banks as they await a couple of key decisions from Canada’s top bank regulator that could affect the lenders and homebuyers.
On Dec. 8, the Office of the Superintendent of Financial Institutions could raise the minimum amount of capital Canada’s largest banks must hold as a buffer against hard times. Then, on Dec. 12, OSFI will make an announcement about the minimum qualifying rate, or stress test, which determines whether homebuyers qualify for a mortgage based on their financial ability to handle interest rate increases. Last year, OSFI left the qualifying rate for uninsured mortgages unchanged at the greater of 5.25 per cent or the mortgage contract rate plus two per cent.
As interest rates were quickly ratcheted up by the Bank of Canada to combat inflation over the past year and half, some in the mortgage industry began pushing to lower or scrap the stress test as homeowners struggled to deal with the twin forces of higher rates and inflation.
Arlene Kish, director of Canadian economics at S&P Global Market Intelligence, said households in Canada are heavily indebted, which is a concerning factor as the economy slows even with recent data showing higher savings rates.
In a Nov. 30 analysis of a decline in Canada’s GDP during the third quarter, Kish noted other concerning trends such as business insolvencies and bankruptcies rising from pandemic lows and the unemployment rate also edging higher.
Against this backdrop, there is general agreement among bank watchers that provisioning for credit losses, whether for loans that are performing or impaired, has not yet peaked.
“It’s not going to be massive increases, but on a quarter-by-quarter basis, we expect the Canadian banks to continue to sort of save for a rainy day,” Khoury said.
Whether those provisions will ultimately be released as loans perform will depend on whether the Bank of Canada begins to cut interest rates by spring 2024, as some economists including those at Fitch suggest.
“We don’t expect there to be significant cracks in the performance of the Canadian consumer,” Koury said. “But we’re not even at pre-pandemic (default) levels, so we expect to see the normalization towards pre-pandemic levels actually shape up in 2024.”
A big factor for the banks will be how mortgage loans perform over the next couple of years. Many were locked in when the Bank of Canada’s overnight interest rate was near zero in the early days of the pandemic in 2020 and 2021. Renewals are likely to be at much higher rates even if the central bank begins to lower rates from five per cent sometime next year.
The Canada Housing and Mortgage Corporation (CMHC) estimates that 2.2 million mortgages will be up for renewal in 2024 and 2025 — with loans totalling $675 billion — or about 45 per cent of all outstanding mortgages in Canada.
Economist and analysts suggest widespread defaults are unlikely as long as employment levels don’t change significantly.
“Barring higher levels of unemployment, I don’t think we’re going to see the needle really move on mortgage defaults,” Khoury said.
File this column under “for what it’s worth.”
“Communication is one of the most important skills you require for a successful life.” — Catherine Pulsifer, author.
I’m one hundred percent in agreement with Pulsifer, which is why my evaluation of candidates begins with their writing skills. If a candidate’s writing skills and verbal communication skills, which I’ll assess when interviewing, aren’t well above average, I’ll pass on them regardless of their skills and experience.
Why?
Because business is fundamentally about getting other people to do things—getting employees to be productive, getting customers to buy your products or services, and getting vendors to agree to a counteroffer price. In business, as in life in general, you can’t make anything happen without effective communication; this is especially true when job searching when your writing is often an employer’s first impression of you.
Think of all the writing you engage in during a job search (resumes, cover letters, emails, texts) and all your other writing (LinkedIn profile, as well as posts and comments, blogs, articles, tweets, etc.) employers will read when they Google you to determine if you’re interview-worthy.
With so much of our communication today taking place via writing (email, text, collaboration platforms such as Microsoft Teams, Slack, ClickUp, WhatsApp and Rocket.Chat), the importance of proficient writing skills can’t be overstated.
When assessing a candidate’s writing skills, you probably think I’m looking for grammar and spelling errors. Although error-free writing is important—it shows professionalism and attention to detail—it’s not the primary reason I look at a candidate’s writing skills.
The way someone writes reveals how they think.
Effective writing isn’t about using sophisticated vocabulary. Hemingway demonstrated that deceptively simple, stripped-down prose can captivate readers. Effective writing takes intricate thoughts and presents them in a way that makes the reader think, “Damn! Why didn’t I see it that way?” A good writer is a dead giveaway for a good thinker. More than ever, the business world needs “good thinkers.”
Therefore, when I come across a candidate who’s a good writer, hence a good thinker, I know they’re likely to be able to write:
Now, let’s talk about the elephant in the room: AI, which job seekers are using en masse. Earlier this year, I wrote that AI’s ability to hyper-increase an employee’s productivity—AI is still in its infancy; we’ve seen nothing yet—in certain professions, such as writing, sales and marketing, computer programming, office and admin, and customer service, makes it a “fewer employees needed” tool, which understandably greatly appeals to employers. In my opinion, the recent layoffs aren’t related to the economy; they’re due to employers adopting AI. Additionally, companies are trying to balance investing in AI with cost-cutting measures. CEOs who’ve previously said, “Our people are everything,” have arguably created today’s job market by obsessively focusing on AI to gain competitive advantages and reduce their largest expense, their payroll.
It wouldn’t be a stretch to assume that most AI usage involves generating written content, content that’s obvious to me, and likely to you as well, to have been written by AI. However, here’s the twist: I don’t particularly care.
Why?
Because the fundamental skill I’m looking for is the ability to organize thoughts and communicate effectively. What I care about is whether the candidate can take AI-generated content and transform it into something uniquely valuable. If they can, they’re demonstrating the skills of being a good thinker and communicator. It’s like being a great DJ; anyone can push play, but it takes skill to read a room and mix music that gets people pumped.
Using AI requires prompting effectively, which requires good writing skills to write clear and precise instructions that guide the AI to produce desired outcomes. Prompting AI effectively requires understanding structure, flow and impact. You need to know how to shape raw information, such as milestones throughout your career when you achieved quantitative results, into a compelling narrative.
So, what’s the best way to gain and enhance your writing skills? As with any skill, you’ve got to work at it.
Two rules guide my writing:
Don’t just string words together; learn to organize your thoughts, think critically, and communicate clearly. Solid writing skills will significantly set you apart from your competition, giving you an advantage in your job search and career.
_____________________________________________________________________
Nick Kossovan, a well-seasoned veteran of the corporate landscape, offers “unsweetened” job search advice. You can send Nick your questions to artoffindingwork@gmail.com.
MONTREAL – Politics, public opinion and salary hikes south of the border helped push Air Canada toward a deal that secures major pay gains for pilots, experts say.
Hammered out over the weekend, the would-be agreement includes a cumulative wage hike of nearly 42 per cent over four years — an enormous bump by historical standards — according to one source who was not authorized to speak publicly on the matter. The previous 10-year contract granted increases of just two per cent annually.
The federal government’s stated unwillingness to step in paved the way for a deal, noted John Gradek, after Prime Minister Justin Trudeau made it plain the two sides should hash one out themselves.
“Public opinion basically pressed the federal cabinet, including the prime minister, to keep their hands clear of negotiations and looking at imposing a settlement,” said Gradek, who teaches aviation management at McGill University.
After late-night talks at a hotel near Toronto’s Pearson airport, the country’s biggest airline and the union representing 5,200-plus aviators announced early Sunday morning they had reached a tentative agreement, averting a strike that would have grounded flights and affected some 110,000 passengers daily.
The relative precariousness of the Liberal minority government as well as a push to appear more pro-labour underlay the prime minister’s hands-off approach to the negotiations.
Trudeau said Friday the government would not step in to fix the impasse — unlike during a massive railway work stoppage last month and a strike by WestJet mechanics over the Canada Day long weekend that workers claimed road roughshod over their constitutional right to collective bargaining. Trudeau said the government respects the right to strike and would only intervene if it became apparent no negotiated deal was possible.
“They felt that they really didn’t want to try for a third attempt at intervention and basically said, ‘Let’s let the airline decide how they want to deal with this one,'” said Gradek.
“Air Canada ran out of support as the week wore on, and by the time they got to Friday night, Saturday morning, there was nothing left for them to do but to basically try to get a deal set up and accepted by ALPA (Air Line Pilots Association).”
Trudeau’s government was also unlikely to consider back-to-work legislation after the NDP tore up its agreement to support the Liberal minority in Parliament, Gradek said. Conservative Leader Pierre Poilievre, whose party has traditionally toed a more pro-business line, also said last week that Tories “stand with the pilots” and swore off “pre-empting” the negotiations.
Air Canada CEO Michael Rousseau had asked Ottawa on Thursday to impose binding arbitration pre-emptively — “before any travel disruption starts” — if talks failed. Backed by business leaders, he’d hoped for an effective repeat of the Conservatives’ move to head off a strike in 2012 by legislating Air Canada pilots and ground crew to stick to their posts before any work stoppage could start.
The request may have fallen flat, however. Gradek said he believes there was less anxiety over the fallout from an airline strike than from the countrywide railway shutdown.
He also speculated that public frustration over thousands of cancelled flights would have flowed toward Air Canada rather than Ottawa, prompting the carrier to concede to a deal yielding “unheard of” gains for employees.
“It really was a total collapse of the Air Canada bargaining position,” he said.
Pilots are slated to vote in the coming weeks on the four-year contract.
Last year, pilots at Delta Air Lines, United Airlines and American Airlines secured agreements that included four-year pay boosts ranging from 34 per cent to 40 per cent, ramping up pressure on other carriers to raise wages.
After more than a year of bargaining, Air Canada put forward an offer in August centred around a 30 per cent wage hike over four years.
But the final deal, should union members approve it, grants a 26 per cent increase in the first year alone, retroactive to September 2023, according to the source. Three wage bumps of four per cent would follow in 2024 through 2026.
Passengers may wind up shouldering some of that financial load, one expert noted.
“At the end of the day, it’s all us consumers who are paying,” said Barry Prentice, who heads the University of Manitoba’s transport institute.
Higher fares may be mitigated by the persistence of budget carrier Flair Airlines and the rapid expansion of Porter Airlines — a growing Air Canada rival — as well as waning demand for leisure trips. Corporate travel also remains below pre-COVID-19 levels.
Air Canada said Sunday the tentative contract “recognizes the contributions and professionalism of Air Canada’s pilot group, while providing a framework for the future growth of the airline.”
The union issued a statement saying that, if ratified, the agreement will generate about $1.9 billion of additional value for Air Canada pilots over the course of the deal.
Meanwhile, labour tension with cabin crew looms on the horizon. Air Canada is poised to kick off negotiations with the union representing more than 10,000 flight attendants this year before the contract expires on March 31.
This report by The Canadian Press was first published Sept. 16, 2024.
Companies in this story: (TSX:AC)
HALIFAX – Ottawa is negotiating a $500-million bailout for Nova Scotia’s privately owned electric utility, saying the money will be used to prevent a big spike in electricity rates.
Federal Natural Resources Minister Jonathan Wilkinson made the announcement today in Halifax, saying Nova Scotia Power Inc. needs the money to cover higher costs resulting from the delayed delivery of electricity from the Muskrat Falls hydroelectric plant in Labrador.
Wilkinson says that without the money, the subsidiary of Emera Inc. would have had to increase rates by 19 per cent over “the short term.”
Nova Scotia Power CEO Peter Gregg says the deal, once approved by the province’s energy regulator, will keep rate increases limited “to be around the rate of inflation,” as costs are spread over a number of years.
The utility helped pay for construction of an underwater transmission link between Newfoundland and Nova Scotia, but the Muskrat Falls project has not been consistent in delivering electricity over the past five years.
Those delays forced Nova Scotia Power to spend more on generating its own electricity.
This report by The Canadian Press was first published Sept. 16, 2024.
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