This video hasn't loaded. We apologize for it.
Click here to see other videos from our team. The S&P TSX Financials Sector Index and the S&P TSX Commercial Banks Index, which tracks Canada's eight largest banks, dropped Thursday, adding to a day of losses as Canada's inflation surged to a four-decade high and the 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 as much as 3.6 per cent to its lowest point in nine months. Canadian Imperial Bank of Commerce and Bank of Nova Scotia fell by as much as 3.4 per cent and 3.3 per cent. The commercial banks index hit its highest February 8 and was one of the strongest performers of the S&P TSX Composite Index before it went down as Russia launched its war in Ukraine on February 24 and central banks warned of a potential economic downturn.
The analysts are warning that profits may not be as strong going forward. Canadian bank earnings estimates for the year 2023 could fall by 16 per cent on average in the case of an economic downturn, according to the RBC Capital Markets. Scotiabank and CIBC are the Big Six bank stocks that have suffered losses this year. 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 for 2023 could decline the most, by 22.5 per cent, to the most out of the group in a note to clients Tuesday. 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 per cent.
Mihelic said that NA and BMO would be good defensive stocks to own heading into a recession. BNS and CM would suffer under bigger earnings declines and some consternation around housing in Canada and higher loan loss concerns. Even so, Canada s banking regulators left a key capital requirement for large banks unchanged on Wednesday, indicating that the banks can absorb potential losses even as economic risks mount. Mihelic said that investors prefer banks that get a head start on building up their reserves. The banks that start to build reserves ahead of peers will be rewarded as long as there are not bank specific issues that cause the reserve build, he said. As the housing market in Canada cools as recession fears mount and Canada s housing market cools, analysts at Barclays and Desjardins have been cutting their price targets on the country's largest lenders. Since March 4, the average price target on the commercial banks index has fallen 6.3 per cent, with the target of CIBC dropping 9.7 per cent.