TORONTO (Reuters) – When Canadian banks report their earnings this week, it is anticipated that they will highlight risks from commercial property loans and disclose an increase in bad debt provisions. The country’s No. 2 bank, TD (TD.TO), will be in the spotlight following the failure of its acquisition of First Horizon (FHN.N), which was the country’s previous focus.
As a result of the upheaval occurring south of the border, analysts on Bay Street have decreased their expectations for the profitability that Canadian banks will report for the second quarter. They are preparing themselves for greater expenses and a slowdown in the growth of new loans. Despite this, investors consider Canadian banks to be safer bets than their American equivalents due to their high capital levels.
According to statements made by Barclays analyst John Aiken, “We believe that cracks in the foundation will become evident” about banks’ profitability for the second quarter that will finish on April 30.
He anticipates that there would be pressure on the valuations of the banks and deteriorating confidence in the future for their earnings.
Aiken, who has changed his assessment of the industry from ” neutral ” to “positive,” stated that investors would pay close attention to management remarks concerning credit and revenue.
It is anticipated that the biggest banks will record an increase in their net interest income for the second quarter of between 3% and 30% compared to the same period a year ago. According to industry analysts’ projections, the Bank of Montreal (BMO.TO) will be the best performer due to its recent acquisition of Bank of the West.
However, according to statistics provided by Refinitiv, loan provisions are forecasted to increase at most leading banks, and this trend is expected to carry over into the third quarter.
The net income is anticipated to be inconsistent, most likely increasing by 5.7% for TD and 7% for BMO while decreasing by between 6% and 17% for the other four banks.
BMO and Scotia Bank (BNS.TO) will announce their profits on Wednesday. At the same time, TD, Canadian Imperial Bank of Commerce (CM.TO), and Royal Bank of Canada (RY.TO) are scheduled to disclose their earnings on Thursday.
This increase will be caused by an increase in the number of insolvencies and an effort to build reserves.
Following revelations in the media that the bank’s anti-money laundering measures were responsible for the collapse of a $13 billion plan to acquire the United States lender First Horizon, the management of TD is expected to face concerns from analysts. In response, TD stated that the company is actively working to tighten its risk management processes and prevent criminals from using the bank for illegal conduct.
Investors are eager to see how the financial institution intends to use its approximately $20 billion excess capital.
Holden anticipates that TD and the National Bank of Canada will each increase their payout by approximately 5%, while the other banks are anticipated to raise their dividends by approximately 3%.
BMO has experienced a loss of almost 3% so far this year, making it the second poorest performance among the major Canadian banks behind TD, which has dropped approximately 6% so far this year. The gains made by RBC, CIBC, National Bank (NA.TO), and Scotia Bank range from 0.5 percent to 12 percent.
Empty office spaces in major cities have caused investors to express worries regarding the commercial property loan exposure of the Big Six banks. This is because commercial real estate accounts for around 10% of the lending portfolio of these banks.
As more businesses move toward a mixed form of work, occupancy rates have remained stable around the 50%.
In addition, the Bank of Canada has stated that it is becoming increasingly concerned about the capacity of households to pay off their debts and that it is observing symptoms of financial stress among certain homebuyers.