Canada’s biggest banks are signalling expectations for a weak economy in 2024 as lenders set aside more money for provisions for loans that could default and cut jobs to rein in mounting expenses.
The country’s largest lenders posted mixed fourth-quarter financial results this week. As uncertainty looms over just how far the economy could tumble next year, bank earnings point to lower profits and an uptick in sour loans.
“We see potential downside risk to 2024 earnings expectations across the banks based on higher credit losses,” CIBC analyst Paul Holden said in a note to clients.
In the fourth quarter, the banks continued increasing their provisions for credit losses (PCLs) – the funds lenders set aside to cover loans that may default.
While the levels of these provisions have been creeping higher in anticipation of a potential economic downturn, the reserves are just starting to rebound to prepandemic levels before the banks released billions of dollars in provisions in 2021, when delinquencies were lower than expected.
Higher interest rates are slowing growth and boosting unemployment, Royal Bank of Canada RY-T chief risk officer Graeme Hepworth said during a conference call with analysts. Less than a third of mortgage clients have seen their payments affected by higher rates, with many fixed-rate mortgages coming up for renewal in the coming years.
“We expect credit outcomes to deteriorate as more clients become impacted by higher interest rates over time as unemployment rates continue to increase,” Mr. Hepworth said.
Bank of Montreal BMO-T and Canadian Imperial Bank of Commerce CM-T were the only large lenders that set aside fewer provisions for loans that are still being repaid this quarter compared with the prior quarter.
“For some reason this quarter, BMO became less negative even as impaired loan losses increased,” RBC analyst Darko Mihelic said in a note to clients. “We do not think this quarter’s PCL actions changes BMO’s credit-quality profile, but we are not fans of the optics either.”
BMO also signalled that it expects provisions for loans that have turned sour to remain below historical averages.
While loan-default rates are expected to edge higher next year, consumers are still sitting on excess savings built up over the pandemic and are reprioritizing their spending to manage higher rates, according to Bank of Montreal chief risk officer Piyush Agrawal. Chequing and savings account balances have fallen over the past year, but customers still have 12 per cent more cash than they had before the COVID-19 pandemic.
“The economy has been holding up very well,” Mr. Agrawal said during a conference call. “We’re seeing positive revisions to economic forecasts, and I think this will play out to our benefit as we go into 2024.”
Meanwhile, inflation has also hit the banks’ balance sheets. Expenses have been steadily climbing throughout the year, prompting many of the large lenders to launch restructuring plans aimed at slashing salary and real estate costs.
Toronto-Dominion Bank TD-T posted $266-million in after-tax restructuring charges, aiming to book savings of about $400-million pretax in 2024.
The bank said it will reduce its work force by 3 per cent, or 3,000 jobs, and reduce its corporate and branch real estate footprint. In the fourth quarter, the bank shed about 0.5 per cent of its employee base, or more than 500 jobs.
“All of those savings will need to be reinvested back into the business, including for risk and control,” Mr. Holden said in a note. “Management is guiding to elevated expense growth in 2024 and about 2 per cent thereafter.”
RBC, BMO and Bank of Nova Scotia BNS-T had previously announced job cuts as part of broader plans to reduce costs.
RBC’s work force dropped by 2.5 per cent in the quarter, trimming 2,355 jobs. BMO’s employee base fell 2.8 per cent as it shed more than 1,500 jobs, with more than half in the U.S.
Scotiabank’s headcount fell 1.7 per cent in the quarter, while CIBC finished the fiscal year with a 5-per-cent reduction in full-time staff. National Bank of Canada avoided big severance charges, but reduced its Canadian employee base by 1.6 per cent in 2023.
Meanwhile, the banks also face a tighter regulatory environment as Canada’s banking watchdog increased levels of capital that the banks must hold. The Office of the Superintendent of Financial Institutions (OSFI) increased the domestic stability buffer (DSB) – a capital reserve banks must build as a cushion against an economic downturn – twice in the past year.
The increase also prompted a change to the minimum capital levels a bank must hold. The common equity tier 1 (CET1) ratio – a measure of a lender’s ability to absorb losses – climbed to 11.5 per cent on Nov. 1. If OSFI were to increase the buffer again, the CET1 ratio could reach as high as 12 per cent.
The banks typically aim to maintain a CET1 ratio at 50 basis points higher than OSFI’s minimum. (One hundred basis points equal one percentage point.) Most of the big banks posted a CET1 ratio of more than 12.5 per cent in the fourth quarter, while CIBC reached 12.4 per cent. Another increase would force the largest lenders to set aside billions of dollars more.