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Canada’s biggest banks should see “modest earnings growth” through a soft economy in 2024 and 2025, with Royal Bank of Canada (RBC) topping its peers, Fitch Ratings says.
In the credit ratings agency’s 2024 Peer Review of Canadian banks, the country’s six largest banks and the Desjardins Group federation of credit unions consistently score in the upper echelons of the rating hierarchy across all categories — a consequence of their scale and conservative risk appetite and management.
“The levelling off of the Canadian economy should be supportive of banks’ financial performance for the second half of 2024,” Fitch Ratings senior director Maria Gabriella Khoury said in a statement. “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.”
Fitch says RBC (RY.TO) should “continue to outperform” the other banks, “driven by its leading market position and distribution.” RBC’s acquisition of HSBC Bank Canada, which closed last spring, should further boost earnings, the report says.
While TD’s (TD.TO) earnings “will be driven by growth in its Canadian and U.S. retail businesses and announced cost savings,” Fitch notes that ongoing investigations into TD’s anti-money laundering practices could have a negative impact. Earnings could be affected by penalties and fines but also by costs related to “strengthening compliance infrastructure,” Fitch says.
The report notes that Canadian Imperial Bank of Commerce (CIBC — CM.TO) has the “most pronounced domestic exposure” of the Canadian banks, with more than 90 per cent of earnings coming from Canada. As such, Fitch says CIBC’s earnings growth will depend on “gains within its Canadian retail business, along with a focus on the mass affluent and private wealth franchises in Canada and the U.S.”
National Bank of Canada (NA.TO) and Bank of Montreal (BMO — BMO.TO) “will benefit from their commercial banking franchises,” the report says, and BMO should also see enhanced earnings from its acquisition of U.S.-based Bank of the West.
Fitch notes that Scotiabank (BNS.TO) plans to pull back from higher-risk markets in Latin America but says that move is “unlikely to have any meaningful impact in 2024.” The Fitch report was written prior to Scotiabank’s purchase of a minority stake in U.S. regional bank KeyCorp.
Fitch’s outlook comes within an economic context it refers to as “stagnant.” The report notes the Bank of Canada’s easing cycle has started but says “any boost to economic activity is some ways off” and that “household spending will likely remain feeble, at least through 2025.”
The ratings agency predicts Canada’s unemployment rate, most recently at 6.4 per cent, to hover just above six per cent into 2026. The report also says the headline Consumer Price Index should drop to two per cent by the end of 2025, and the Bank of Canada’s overnight rate should hit 2.5 per cent by the end of 2026.
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf.
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