Canadian Banks Anticipate Lower Loan Losses
TORONTO – Major Canadian banks are likely to reduce their loan loss provisions for the third quarter, as the impact of US tariffs appears to be less severe than initially feared.
Data from LSEG indicates that the Big Six banks are projected to report approximately $5.22 billion in loan losses for the third quarter, down from $6.37 billion in the previous quarter.
In recent months, banks have ramped up their provisions to account for possible bad debts, concerned that a potential trade war in North America would adversely affect the economy, leading to defaults on various loans, including commercial, credit card, and mortgage loans.
Interestingly, around 92% of Canadian exports by value were exempt from US tariffs as of June, according to information from the US Census Bureau.
On a related note, Prime Minister Mark Kearney has recently lifted some retaliatory tariffs previously imposed on the US.
Matthew Lee, an analyst with Canaccord, mentioned that, “Three months later, Coolerhead thinks there could be mutually managed tariffs between countries involved in the casma agreements,” referring to the trade framework involving Canada, the US, and Mexico.
While analysts were initially optimistic that banks might benefit from a steady decline in loan loss provisions, low demand has dampened overall loan growth.
The revenue season for Canadian banks will kick off on Tuesday with results from the Bank of Montreal and Bank of Nova Scotia.
Net interest income, which represents the difference between what banks earn from loans and what they pay on deposits, is expected to rise between 9.3% and 57% this quarter.
Analysts are hopeful that the capital markets and asset management sectors will provide a boost for the banks.
Historically, Canadian banks are among the most capitalized globally, but finding investment opportunities at home has proven challenging. As a result, they are turning to stock buybacks, anticipating around $4 billion in such activities during the third quarter.
Shalabh Garg, an analyst at Veritas, expressed interest in hearing about the banks’ plans regarding capital deployment, which he believes could help them reach their mid-term financial goals.
Over the years, banks in Canada have expanded into the US market due to limited growth prospects domestically, focusing particularly on building their asset management operations.
