As choppy markets hurt wealth management and a slow deal pipeline dents income from investment banking, it is expected that Canadian banks will post a decline in fourth-quarter profits, which is what is expected to offset expected gains from business loans.
The earnings reports were released on Tuesday, a culmination of a tumultuous year in which inflation reached decades-high levels and the Bank of Canada embarked on a relentless monetary tightening campaign.
The Big Six banks' profit is expected to drop 4% from last year, hurt by lower investment banking activity. The mergers and acquisitions M&A in the three months ended Sept. 30 nearly halved to C $22.8 billion $17 billion, according to Refinitiv data.
The banking sub-index dropped 6.8% this year, compared to a 4.7% decline in the broader benchmark, as investors have already marked down bank stocks anticipating a weaker quarter.
The Big Six lost C $63.5 billion of market value since the Bank of Canada's first rate hike in March.
Credit Suisse analysts Joo Ho Kim and Amanda Abraham said that the increased volatility and pressure on equity markets could lead to a continuation of the weaker underwriting revenue this quarter.
The biggest capital markets businesses, Royal Bank of Canada and Bank of Montreal, are expected to see the biggest hit to profits.
Analysts are divided on the impact of a slowing economy, as some macro indicators still point to robust demand for loans.
In a note from Meny Grauman and Felix Fang of the Bank of Nova Scotia, the bottom line is that those looking for proof of a recession in this latest batch of bank results will be sorely disappointed.
Credit conditions are expected to hold up remarkably well as we believe that a defensive posturing remains appropriate heading into fiscal 2023.
The central bank's rate hikes are expected to have boosted the top six Canadian lenders' net interest margin, a key indicator of how much banks earn through lending, by nearly 8 basis points from last year.
KBW analysts Mike Rizvanovic and Abhilash Shashidharan said business lending was particularly strong and aided by strength in balances outside Canada.
The data from the Office of the Superintendent of Financial Institutions showed that loans grew 15% in the first two months of the quarter.
Too high rates can cause borrowers to spend less and save more, hurting loan demand. Banks are faced with an uphill battle navigating a downtrend in the housing market as higher borrowing costs eliminate potential homebuyers, casting a pall on what is typically a lucrative revenue stream for lenders.
Mortgages account for nearly 65% of the banks' domestic loans.
The 4 lender, with over 50% of its total loans being domestic retail mortgages, will be hit harder than peers, analysts said.
There are signs that the Bank of Canada could be approaching the end of its hawkish rate hike cycle, which could stabilize the housing market and spur overall credit demand.
Banks' fourth-quarter bad debt provisions are expected to triple from last year and their 2023 forecast for the same will be a key focus at a time when investors are punishing stocks at the slightest indication of a crack in consumers' financial health.
Cormark analysts think Bank of Nova Scotia, which was more aggressive than its peers in releasing reserves during the Pandemic, will be more aggressive in building back bad debt provisions as challenges persist.
National Bank of Canada and Toronto-Dominion Bank will report earnings on Wednesday and Friday.