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.
MONTREAL – Travel company Transat AT Inc. reported a loss in its latest quarter compared with a profit a year earlier as its revenue edged lower.
The parent company of Air Transat says it lost $39.9 million or $1.03 per diluted share in its quarter ended July 31.
The result compared with a profit of $57.3 million or $1.49 per diluted share a year earlier.
Revenue in what was the company’s third quarter totalled $736.2 million, down from $746.3 million in the same quarter last year.
On an adjusted basis, Transat says it lost $1.10 per share in its latest quarter compared with an adjusted profit of $1.10 per share a year earlier.
Transat chief executive Annick Guérard says demand for leisure travel remains healthy, as evidenced by higher traffic, but consumers are increasingly price conscious given the current economic uncertainty.
This report by The Canadian Press was first published Sept. 12, 2024.
Companies in this story: (TSX:TRZ)
The Canadian Press. All rights reserved.
Dollarama Inc.’s food aisles may have expanded far beyond sweet treats or piles of gum by the checkout counter in recent years, but its chief executive maintains his company is “not in the grocery business,” even if it’s keeping an eye on the sector.
“It’s just one small part of our store,” Neil Rossy told analysts on a Wednesday call, where he was questioned about the company’s food merchandise and rivals playing in the same space.
“We will keep an eye on all retailers — like all retailers keep an eye on us — to make sure that we’re competitive and we understand what’s out there.”
Over the last decade and as consumers have more recently sought deals, Dollarama’s food merchandise has expanded to include bread and pantry staples like cereal, rice and pasta sold at prices on par or below supermarkets.
However, the competition in the discount segment of the market Dollarama operates in intensified recently when the country’s biggest grocery chain began piloting a new ultra-discount store.
The No Name stores being tested by Loblaw Cos. Ltd. in Windsor, St. Catharines and Brockville, Ont., are billed as 20 per cent cheaper than discount retail competitors including No Frills. The grocery giant is able to offer such cost savings by relying on a smaller store footprint, fewer chilled products and a hearty range of No Name merchandise.
Though Rossy brushed off notions that his company is a supermarket challenger, grocers aren’t off his radar.
“All retailers in Canada are realistic about the fact that everyone is everyone’s competition on any given item or category,” he said.
Rossy declined to reveal how much of the chain’s sales would overlap with Loblaw or the food category, arguing the vast variety of items Dollarama sells is its strength rather than its grocery products alone.
“What makes Dollarama Dollarama is a very wide assortment of different departments that somewhat represent the old five-and-dime local convenience store,” he said.
The breadth of Dollarama’s offerings helped carry the company to a second-quarter profit of $285.9 million, up from $245.8 million in the same quarter last year as its sales rose 7.4 per cent.
The retailer said Wednesday the profit amounted to $1.02 per diluted share for the 13-week period ended July 28, up from 86 cents per diluted share a year earlier.
The period the quarter covers includes the start of summer, when Rossy said the weather was “terrible.”
“The weather got slightly better towards the end of the summer and our sales certainly increased, but not enough to make up for the season’s horrible start,” he said.
Sales totalled $1.56 billion for the quarter, up from $1.46 billion in the same quarter last year.
Comparable store sales, a key metric for retailers, increased 4.7 per cent, while the average transaction was down2.2 per cent and traffic was up seven per cent, RBC analyst Irene Nattel pointed out.
She told investors in a note that the numbers reflect “solid demand as cautious consumers focus on core consumables and everyday essentials.”
Analysts have attributed such behaviour to interest rates that have been slow to drop and high prices of key consumer goods, which are weighing on household budgets.
To cope, many Canadians have spent more time seeking deals, trading down to more affordable brands and forgoing small luxuries they would treat themselves to in better economic times.
“When people feel squeezed, they tend to shy away from discretionary, focus on the basics,” Rossy said. “When people are feeling good about their wallet, they tend to be more lax about the basics and more willing to spend on discretionary.”
The current economic situation has drawn in not just the average Canadian looking to save a buck or two, but also wealthier consumers.
“When the entire economy is feeling slightly squeezed, we get more consumers who might not have to or want to shop at a Dollarama generally or who enjoy shopping at a Dollarama but have the luxury of not having to worry about the price in some other store that they happen to be standing in that has those goods,” Rossy said.
“Well, when times are tougher, they’ll consider the extra five minutes to go to the store next door.”
This report by The Canadian Press was first published Sept. 11, 2024.
Companies in this story: (TSX:DOL)
TORONTO – The U.S. Consumer Financial Protection Bureau has ordered TD Bank Group to pay US$28 million for repeatedly sharing inaccurate, negative information about its customers to consumer reporting companies.
The agency says TD has to pay US$7.76 million in total to tens of thousands of victims of its illegal actions, along with a US$20 million civil penalty.
It says TD shared information that contained systemic errors about credit card and bank deposit accounts to consumer reporting companies, which can include credit reports as well as screening reports for tenants and employees and other background checks.
CFPB director Rohit Chopra says in a statement that TD threatened the consumer reports of customers with fraudulent information then “barely lifted a finger to fix it,” and that regulators will need to “focus major attention” on TD Bank to change its course.
TD says in a statement it self-identified these issues and proactively worked to improve its practices, and that it is committed to delivering on its responsibilities to its customers.
The bank also faces scrutiny in the U.S. over its anti-money laundering program where it expects to pay more than US$3 billion in monetary penalties to resolve.
This report by The Canadian Press was first published Sept. 11, 2024.
Companies in this story: (TSX:TD)
The Canadian Press. All rights reserved.
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