Heightened Mortgage Renewal Pressure Spells Potential Credit Losses for Canada’s Major Banks

The upcoming fourth-quarter earnings for Canada’s major banks, set to be unveiled on November 28, are poised to draw significant attention to credit losses and cost management. As households and businesses grapple with heightened interest rates and a somewhat uncertain economic outlook, the focus on these earnings becomes more critical.

Analyst Paul Holden from CIBC Capital Markets highlighted the minimal likelihood of negative surprises in credit losses. However, any unexpected dips in these areas within the year-end reports might provoke notable reactions from investors, according to his note to clients. Despite potential earnings outperformances, if credit losses remain lower than expected, banks may not reap significant rewards.

The anticipation surrounding the fourth-quarter financial reports suggests an anticipated slowdown in loan and revenue growth. Holden foresees forthcoming dividend increases but predicts more restrained hikes of around one to three percent, owing to subdued earnings growth and projected challenges in the upcoming year.

Holden’s analysis indicates a prevailing sentiment anchored on expecting higher losses in fiscal 2024 due to the economic dimming, a view unlikely to change based on the fourth-quarter results or management insights.

The banking sector finds itself in a pivotal phase, aligning expenses with subdued growth expectations after ramping up hiring and planning augmented expenditures, banking on an anticipated profitable year. This strategic maneuver aims to ease the eventual recovery. However, Holden highlighted that expense adjustments might continue, potentially leading to further severance costs as banks reduce headcounts.

Amidst uncertainties regarding regulatory capital requirements from the Office of the Superintendent of Financial Institutions (OSFI) in December, banks anticipate clarity on buffer necessities against tough economic times. Gabriel Dechaine from the National Bank of Canada anticipates a probable increase in the common equity tier one (CET1) ratio by 50 basis points to 12 percent, with banks working to build ratios above this threshold. Should OSFI adopt a more accommodating stance, the sector might experience a relief rally.

The upcoming financial results also hint at stabilizing trends, such as the net interest margin (NIM), providing a reprieve as NIM compression had been a recent trend. Actions to control expenses have been telegraphed by most banks, with some already announcing substantial charges while others are expected to follow suit in subsequent quarters. Looking ahead, there’s projected upward pressure on provisions for credit losses as banks gear up for a surge in mortgage refinancings in 2025 and 2026. The cautious outlook underscores the possibility of a more challenging landscape for Canadian banks should economic conditions deteriorate further.

Scroll to Top