What to know about Canada’s top bank earnings this week #CanadaFinance

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An array of issues ranging from a potential increase in provisions for credit losses (PCL) and the impact of the Bank of Canada’s rate cuts on loans to money laundering troubles are likely to dominate discussions this week and next as Canada’s top banks release their earnings.

Among the Big Six, Toronto-Dominion Bank will be the first to release its earnings on Aug. 22, followed by the rest of the group next week.

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Most analysts expect the banks to report positive numbers, but some concerns remain as the provisions for credit losses, or the money that banks need to keep aside to tackle potential credit losses, are likely to have increased.

Analysts expect the Bank of Montreal in particular to be affected as one of its customers in the United States declared bankruptcy. This could have an “outsized impact” on BMO’s credit loss provision in the second half, according to Matthew Lee, an analyst at Canaccord Genuity Group Inc.

“Our key focus for the quarter will be on credit as pressure mounts from both commercial and personal banking customers,” Lee said in a note on Aug. 13.

He expects BMO’s PCL to increase by 56 per cent year over year to $768 million, which could be a “risk” to growth expectations.

Gabriel Dechaine, an analyst at National Bank of Canada, increased the sector’s expected PCL ratio, which measures the provision for credit losses as a percentage of net loans, to 47 basis points from 45 for the sector due to “rising insolvencies in Canada, potential commercial impairments and losses in some consumer categories (e.g., auto).”

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Aria Samarzadeh, an analyst at Jefferies Securities Inc., forecasts the total PCL will rise by 2.4 per cent in the third quarter from the second quarter and 25.9 per cent from the same period a year ago.

“We believe the pace of provision for credit loss growth will moderate but continue to edge higher amid signs of slowing employment and economic growth,” he said in a note on Aug. 12.

At the same time, analysts expect the Bank of Canada’s rate cuts to improve loan growth in the coming months. The central bank has cut rates twice since June and economists expect a few more before the end of the year.

While Lee doesn’t expect the cuts to impact the banks’ results in the third quarter, the acceleration of loan growth is a “tenable possibility” in the first half of 2025, he said.

Dechaine echoed a similar sentiment and said that a “sufficient level of rate cuts” should allow Canadian banks to avoid a “sharp uptick” in loan losses.

These factors are likely to help TD post robust numbers as the bank continues to grab market share in mortgage lending and other loan categories, Lee said, but investors’ focus is likely to remain on TD’s anti-money laundering issues last quarter.

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The bank is under investigation in the U.S. over allegations of money laundering and other financial crimes at several of the bank’s U.S. branches. According to Dechaine, TD is not just looking at a fine, but could also face a cap on its asset growth in the U.S. TD has denied the allegations.

The banks’ results will also be a good opportunity to learn more about the acquisitions that have recently taken place.

On Aug. 12, Bank of Nova Scotia inked a deal to buy 14.9 per cent of Cleveland-based KeyCorp for about $3.9 billion as it looks to boost its focus on developed economies and strengthen its North American footprint. The deal received a mixed response from analysts.

“We have reduced our valuation multiple on BNS post-transaction, reflecting our lower forecasted capital and the view that the firm will be slower to share buyback than its peers,” said Lee at Canaccord.

Investors will also be keen to learn more about the benefits and synergies linked to National Bank’s acquisition of Canadian Western Bank. The $5-billion, all-stock deal will expand the Quebec-focused bank’s reach to Alberta and British Columbia.

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This is also the first full quarter since the Royal Bank of Canada completed its purchase of HSBC Holdings PLC‘s Canadian business.

Overall, the levelling off in the Canadian economy should support the banks’ performance in the second half of 2024, Maria Gabriella Khory, Fitch Ratings Canada Inc.’s senior director, said in a statement on Aug. 12.

“Canadian banks’ risk profiles are largely conservative and supported by well-managed exposures and underwriting practices that have led to low loan impairments and credit losses,” she said.

All the Big Six Canadian banks except TD have stable rating outlooks, according to Fitch.

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