Canadian bank profits to grow, but face rising insolvencies and weak housing market

Toronto-Dominion Bank and Bank of Montreal (BMO) signages is seen in the Financial District of Toronto. THE CANADIAN PRESS/Spencer Colby

Profits at Canada’s largest banks are expected to have increased despite trade tensions, the Middle East conflict and broader economic uncertainty, but now face tougher tests as more consumers struggle to pay debts and a subdued housing market weighs on their core domestic business.

The big banks — Royal Bank of Canada, TD Bank, BMO, Bank of Nova Scotia, CIBC and National Bank of Canada — which together control more than 90 per cent of the market, are expected to report strong second-quarter earnings starting on Wednesday, helped by trading revenue and their capital markets businesses.

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“Banks have been beating expectations consistently for the past two years,” said National Bank analyst Gabriel Dechaine. “With credit losses stubbornly elevated and margin expansion potentially stalling this quarter, the onus falls on the capital markets business to deliver, yet again.”

Higher profits

Profit for the big six banks is expected to grow between 10 per cent and 25 per cent year over year in the quarter ended April 30, a period marked by uncertainty stemming from the Middle East conflict and slower economic growth in Canada.

The number of Canadians filing for insolvency has steadily increased, rising about 26 per cent between December and March. That points to households struggling to keep up with credit card debt, auto loans and potentially mortgages, which could push up loan-loss provisions — funds banks set aside to cover bad loans.

“It’s not a pretty picture,” said John Zechner, founder of J. Zechner Associates, referring to rising debt. “But they’ve (the banks) really proven themselves. Ever since the financial crisis, the banks are so different. They diversified better ... they’ve insulated themselves better.”

Shares of the big six banks have gained between 10 per cent and 29 per cent so far this year, benefiting from a market boosted by high commodity prices and outpacing the broader Toronto stock benchmark as well as some U.S. peers, including JPMorgan and Citigroup.

Middle East tensions

The banks do not have significant operations in the Middle East, but have expressed interest in expanding in the region as Prime Minister Mark Carney pushes to diversify trade, potentially increasing capital flows back into Canada.

However, as lenders look to grow beyond a saturated domestic market, some international exposures could come under pressure due to the conflict and uneven macro landscape.

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Canaccord Genuity analyst Matthew Lee said he was cautious about Bank of Nova Scotia’s exposure to Chile and National Bank’s exposure to Cambodia, as an extended conflict could affect poorer, fuel-importing countries.

Banks with larger U.S. operations, including BMO and TD, are better positioned to benefit from stronger economic conditions there, he added.

Sources: Average analyst estimates compiled by LSEG, company results

(Reporting by Nivedita Balu in Toronto, Editing by Rod Nickel)