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.
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.
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