Canadian banks fall 20% on recession fears

Canadian banks fall 20% on recession fears

Canadian banks fell about 20% from their record high set in early February due to the recession fears that investors are fleeing.

The S&P TSX Commercial Banks Index, which tracks the country's eight largest banks, dropped Thursday, adding to another day of losses after inflation in Canada surged to a four-decade high and US data pointed to rising unemployment and slumping manufacturing and services activity.

Toronto-Dominion Bank, Canada's second largest lender, suffered losses as it dropped 3.3% to its lowest point in nearly nine months. The Canadian Imperial Bank of Commerce and Bank of Nova Scotia each fell by 3%.

The commercial banks index hit its highest on February 8 and was one of the strongest performers of the S&P TSX Composite Index before soaring as Russia launched its war in Ukraine on February 24 and central banks warned of a potential economic downturn.

Analysts are warning that profits may not be as strong going forward. Canadian bank earnings estimates for 2023 could fall by 16% on average in the event of an economic downturn, according to the RBC Capital MarketsRBC Capital Markets. Scotiabank and CIBC are among the Big Six bank stocks that have suffered losses this year. Both banks, Canada's third and fifth-largest banks, could have further to fall as they rebuild loan loss provisions that were previously unwound earlier this year due to the pandemic restrictions.

RBC analyst Darko Mihelic said that Scotiabank's core earnings per share could decline by 22.5% in a note to clients for 2023, the most out of the group's core earnings per share could decline by 22.5%. The bank released the most performing reserves of the group, while Bank of Montreal and National Bank of Canada would be the least impacted, with each bank's core EPS estimates falling by 12.6%.

Mihelic said that NA and BMO would be good defensive stocks to own heading into a recession. BNS and CM would likely suffer under bigger earnings declines and some consternation around housing in Canada and higher loan loss concerns. In May, Canada's inflation climbed to 7.7%, reaching its highest point in 40 years, Statistics Canada said on Wednesday. The Bank of Canada expects to deliver aggressive rate increases next month, which is bolstered by the jump.

Even so, Canada s banking regulators left a key capital requirement unchanged for large banks on Wednesday, indicating that the banks can absorb potential losses even as economic risks mount.

"Investors prefer banks that get a head start on building up their reserves," Mihelic said.

As long as there aren't bank specific issues that cause the reserve build, banks that start to build reserves ahead of peers will be rewarded, he said.

As the housing market in Canada cools and the recession fears mount, analysts including those at Barclays and Desjardins have been cutting their price targets on the country's largest lenders. Since early March 4, the average price target on the commercial banks index fell 6.3%, with the target of CIBC dropping 9.7%.

The Age of Credibility for Central Banks is over, and there is no age of credibility for them.