Signs of economic slowdown are growing, and Canadian banks could add more evidence this upcoming week.
The Big Six banks are set to report fourth quarter results that analysts expect to show lower earnings, more money set aside to cover bad loans, and hints of rising mortgage strain.
The results come as economic growth has rolled to a near standstill over the last several months, the engine stalled after the Bank of Canada raised its key interest rate to five per cent.
Higher borrowing costs and more cautious banks mean that lending growth has slowed notably.
“The key trend in the banking industry right now is really the decrease in lending across the Canadian market,” said Shilpa Mishra, managing director in BDO’s capital advisory services.
The pace of lending growth in the third quarter was about half what it was a year ago, while it was down slightly from the previous quarter, she noted.
Not only are banks slowing the pace of new lending, but they’re setting aside more money for loans that could go or are already going bad as higher interest rates add strain to borrowers. That will be a big influence on earnings.
“We anticipate mixed results from the Canadian banks amid an increasingly uncertain environment,” said Mishra, “This is going to be primarily due to the provision for credit losses.”
RBC Capital Markets analysts are predicting total provisions for credit losses in the sector to increase 13 per cent from the previous quarter to $3.3 billion because the macroeconomic environment has worsened.
The money they’re setting aside is a big part of the reason Scotiabank analyst Meny Grauman expects earnings per share to be down three per cent from the previous quarter, and seven per cent from last year.
“Over the past quarter, we have witnessed a clear deterioration in a host of Canadian macro(economic) indicators, including GDP and employment,” Grauman said in a report.
Unemployment ticked up 0.2 percentage points to 5.7 per cent in October for the fourth monthly increase, while August GDP growth was essentially flat and the flash estimate for September was also unchanged, according to Statistics Canada.
Indications of slowing can be seen in other key areas like real estate, where October home sales were down 5.6 per cent from September sales, which were down 1.9 per cent from August, according to the Canadian Real Estate Association.
“The economy is slowing now, with growth in gross domestic product near zero over the past several months,” Bank of Canada governor Tiff Macklem said last week.
He also noted the inflation rate has fallen from 8.1 per cent in June 2022 to 3.1 per cent last month.
“This tightening of monetary policy is working, and interest rates may now be restrictive enough to get us back to price stability.”
Grauman said the bond market is pricing in a cut from the Bank of Canada by the second quarter of next year, and the U.S. Fed a quarter earlier, but he thinks that’s optimistic.
“We remain skeptical that central banks will be in a position to ease in late 2024, let alone early in the year, and continue to view the risk of higher-for-longer rates as the key macro issue facing Canadian bank stocks.”
He expects consumer finances to be increasingly strained in the higher-for-longer scenario, and will be listening for hints from bank executives of how much strain they expect from borrowers.
Waves of mortgage renewals are coming in the next few years that will push monthly payments higher, and are expected to keep pressure on borrowing.
Banks have been readying for the slowdown by cutting back on expenses, including on staff. Scotiabank said in October it was cutting about 2,700 staff, while RBC announced last quarter it had cut around 900 jobs and planned to cut upwards of 1,900 more. Other banks have also taken some charges related to staffing cuts.
Fourth quarter results could reveal further trimming, but Mishra said she expects much of those job-cutting efforts to be done.
“I don’t think there’s going to be more of that,” said Mishra. “But we’re definitely going to see more restructuring in the lending and capital market businesses and focus on profitable and higher-margin businesses.”
Overall, the shifts in the quarter will show banks preparing for rockier times, but not likely dramatic swings, she said.
“There isn’t that tsunami of distress that we were expecting, there is more focus on cash flow, liquidity management, balance sheet management.”
Scotiabank kicks off earnings on Nov. 28, CIBC, TD Bank and RBC report on Nov. 30, and BMO and National Bank report on Dec. 1.
TOKYO (AP) — Japanese technology group SoftBank swung back to profitability in the July-September quarter, boosted by positive results in its Vision Fund investments.
Tokyo-based SoftBank Group Corp. reported Tuesday a fiscal second quarter profit of nearly 1.18 trillion yen ($7.7 billion), compared with a 931 billion yen loss in the year-earlier period.
Quarterly sales edged up about 6% to nearly 1.77 trillion yen ($11.5 billion).
SoftBank credited income from royalties and licensing related to its holdings in Arm, a computer chip-designing company, whose business spans smartphones, data centers, networking equipment, automotive, consumer electronic devices, and AI applications.
The results were also helped by the absence of losses related to SoftBank’s investment in office-space sharing venture WeWork, which hit the previous fiscal year.
WeWork, which filed for Chapter 11 bankruptcy protection in 2023, emerged from Chapter 11 in June.
SoftBank has benefitted in recent months from rising share prices in some investment, such as U.S.-based e-commerce company Coupang, Chinese mobility provider DiDi Global and Bytedance, the Chinese developer of TikTok.
SoftBank’s financial results tend to swing wildly, partly because of its sprawling investment portfolio that includes search engine Yahoo, Chinese retailer Alibaba, and artificial intelligence company Nvidia.
SoftBank makes investments in a variety of companies that it groups together in a series of Vision Funds.
The company’s founder, Masayoshi Son, is a pioneer in technology investment in Japan. SoftBank Group does not give earnings forecasts.
Shopify Inc. executives brushed off concerns that incoming U.S. President Donald Trump will be a major detriment to many of the company’s merchants.
“There’s nothing in what we’ve heard from Trump, nor would there have been anything from (Democratic candidate) Kamala (Harris), which we think impacts the overall state of new business formation and entrepreneurship,” Shopify’s chief financial officer Jeff Hoffmeister told analysts on a call Tuesday.
“We still feel really good about all the merchants out there, all the entrepreneurs that want to start new businesses and that’s obviously not going to change with the administration.”
Hoffmeister’s comments come a week after Trump, a Republican businessman, trounced Harris in an election that will soon return him to the Oval Office.
On the campaign trail, he threatened to impose tariffs of 60 per cent on imports from China and roughly 10 per cent to 20 per cent on goods from all other countries.
If the president-elect makes good on the promise, many worry the cost of operating will soar for companies, including customers of Shopify, which sells e-commerce software to small businesses but also brands as big as Kylie Cosmetics and Victoria’s Secret.
These merchants may feel they have no choice but to pass on the increases to customers, perhaps sparking more inflation.
If Trump’s tariffs do come to fruition, Shopify’s president Harley Finkelstein pointed out China is “not a huge area” for Shopify.
However, “we can’t anticipate what every presidential administration is going to do,” he cautioned.
He likened the uncertainty facing the business community to the COVID-19 pandemic where Shopify had to help companies migrate online.
“Our job is no matter what comes the way of our merchants, we provide them with tools and service and support for them to navigate it really well,” he said.
Finkelstein was questioned about the forthcoming U.S. leadership change on a call meant to delve into Shopify’s latest earnings, which sent shares soaring 27 per cent to $158.63 shortly after Tuesday’s market open.
The Ottawa-based company, which keeps its books in U.S. dollars, reported US$828 million in net income for its third quarter, up from US$718 million in the same quarter last year, as its revenue rose 26 per cent.
Revenue for the period ended Sept. 30 totalled US$2.16 billion, up from US$1.71 billion a year earlier.
Subscription solutions revenue reached US$610 million, up from US$486 million in the same quarter last year.
Merchant solutions revenue amounted to US$1.55 billion, up from US$1.23 billion.
Shopify’s net income excluding the impact of equity investments totalled US$344 million for the quarter, up from US$173 million in the same quarter last year.
Daniel Chan, a TD Cowen analyst, said the results show Shopify has a leadership position in the e-commerce world and “a continued ability to gain market share.”
In its outlook for its fourth quarter of 2024, the company said it expects revenue to grow at a mid-to-high-twenties percentage rate on a year-over-year basis.
“Q4 guidance suggests Shopify will finish the year strong, with better-than-expected revenue growth and operating margin,” Chan pointed out in a note to investors.
This report by The Canadian Press was first published Nov. 12, 2024.
TORONTO – RioCan Real Estate Investment Trust says it has cut almost 10 per cent of its staff as it deals with a slowdown in the condo market and overall pushes for greater efficiency.
The company says the cuts, which amount to around 60 employees based on its last annual filing, will mean about $9 million in restructuring charges and should translate to about $8 million in annualized cash savings.
The job cuts come as RioCan and others scale back condo development plans as the market softens, but chief executive Jonathan Gitlin says the reductions were from a companywide efficiency effort.
RioCan says it doesn’t plan to start any new construction of mixed-use properties this year and well into 2025 as it adjusts to the shifting market demand.
The company reported a net income of $96.9 million in the third quarter, up from a loss of $73.5 million last year, as it saw a $159 million boost from a favourable change in the fair value of investment properties.
RioCan reported what it says is a record-breaking 97.8 per cent occupancy rate in the quarter including retail committed occupancy of 98.6 per cent.
This report by The Canadian Press was first published Nov. 12, 2024.
