Canada’s biggest banks are signalling expectations for a weak economy in 2024 as lenders set aside more money for provisions for loans that could default and cut jobs to rein in mounting expenses.
The country’s largest lenders posted mixed fourth-quarter financial results this week. As uncertainty looms over just how far the economy could tumble next year, bank earnings point to lower profits and an uptick in sour loans.
“We see potential downside risk to 2024 earnings expectations across the banks based on higher credit losses,” CIBC analyst Paul Holden said in a note to clients.
In the fourth quarter, the banks continued increasing their provisions for credit losses (PCLs) – the funds lenders set aside to cover loans that may default.
While the levels of these provisions have been creeping higher in anticipation of a potential economic downturn, the reserves are just starting to rebound to prepandemic levels before the banks released billions of dollars in provisions in 2021, when delinquencies were lower than expected.
Higher interest rates are slowing growth and boosting unemployment, Royal Bank of Canada RY-T chief risk officer Graeme Hepworth said during a conference call with analysts. Less than a third of mortgage clients have seen their payments affected by higher rates, with many fixed-rate mortgages coming up for renewal in the coming years.
“We expect credit outcomes to deteriorate as more clients become impacted by higher interest rates over time as unemployment rates continue to increase,” Mr. Hepworth said.
Bank of Montreal BMO-T and Canadian Imperial Bank of Commerce CM-T were the only large lenders that set aside fewer provisions for loans that are still being repaid this quarter compared with the prior quarter.
“For some reason this quarter, BMO became less negative even as impaired loan losses increased,” RBC analyst Darko Mihelic said in a note to clients. “We do not think this quarter’s PCL actions changes BMO’s credit-quality profile, but we are not fans of the optics either.”
BMO also signalled that it expects provisions for loans that have turned sour to remain below historical averages.
While loan-default rates are expected to edge higher next year, consumers are still sitting on excess savings built up over the pandemic and are reprioritizing their spending to manage higher rates, according to Bank of Montreal chief risk officer Piyush Agrawal. Chequing and savings account balances have fallen over the past year, but customers still have 12 per cent more cash than they had before the COVID-19 pandemic.
“The economy has been holding up very well,” Mr. Agrawal said during a conference call. “We’re seeing positive revisions to economic forecasts, and I think this will play out to our benefit as we go into 2024.”
Meanwhile, inflation has also hit the banks’ balance sheets. Expenses have been steadily climbing throughout the year, prompting many of the large lenders to launch restructuring plans aimed at slashing salary and real estate costs.
Toronto-Dominion Bank TD-T posted $266-million in after-tax restructuring charges, aiming to book savings of about $400-million pretax in 2024.
The bank said it will reduce its work force by 3 per cent, or 3,000 jobs, and reduce its corporate and branch real estate footprint. In the fourth quarter, the bank shed about 0.5 per cent of its employee base, or more than 500 jobs.
“All of those savings will need to be reinvested back into the business, including for risk and control,” Mr. Holden said in a note. “Management is guiding to elevated expense growth in 2024 and about 2 per cent thereafter.”
RBC, BMO and Bank of Nova Scotia BNS-T had previously announced job cuts as part of broader plans to reduce costs.
RBC’s work force dropped by 2.5 per cent in the quarter, trimming 2,355 jobs. BMO’s employee base fell 2.8 per cent as it shed more than 1,500 jobs, with more than half in the U.S.
Scotiabank’s headcount fell 1.7 per cent in the quarter, while CIBC finished the fiscal year with a 5-per-cent reduction in full-time staff. National Bank of Canada avoided big severance charges, but reduced its Canadian employee base by 1.6 per cent in 2023.
Meanwhile, the banks also face a tighter regulatory environment as Canada’s banking watchdog increased levels of capital that the banks must hold. The Office of the Superintendent of Financial Institutions (OSFI) increased the domestic stability buffer (DSB) – a capital reserve banks must build as a cushion against an economic downturn – twice in the past year.
The increase also prompted a change to the minimum capital levels a bank must hold. The common equity tier 1 (CET1) ratio – a measure of a lender’s ability to absorb losses – climbed to 11.5 per cent on Nov. 1. If OSFI were to increase the buffer again, the CET1 ratio could reach as high as 12 per cent.
The banks typically aim to maintain a CET1 ratio at 50 basis points higher than OSFI’s minimum. (One hundred basis points equal one percentage point.) Most of the big banks posted a CET1 ratio of more than 12.5 per cent in the fourth quarter, while CIBC reached 12.4 per cent. Another increase would force the largest lenders to set aside billions of dollars more.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
