Canadian banks are expected to report a rise in bad debt provisions and highlight risks from commercial property loans when they report earnings this week, with the country's No.2 bank TD (TD.TO) in focus after its acquisition of First Horizon (FHN.N) failed.
Bay Street analysts have lowered their second quarter earnings expectations for Canadian banks, anticipating higher expenses and slowing loan growth as turmoil south of the border weighs on the broader banking sector. Still, investors view Canadian banks as safer bets than their U.S. counterparts due to their strong capital levels.
Advertisement · Scroll to continue "We believe that cracks in the foundation will become evident," Barclays analyst John Aiken said about bank earnings for the second quarter ending April 30.
He expects pressure on the banks' valuations and declining confidence in their earnings outlook.
Aiken, who has lowered his outlook for the sector to 'neutral' from 'positive,' said management commentary around credit and revenue will be front and center in investors' minds.
"Unfortunately, we see more downside risk than upside," he added.
The top banks are expected to report net interest income growth of between 3% and 30% for the second quarter from a year ago, with analysts forecasting Bank of Montreal (BMO.TO) to be the top performer thanks to its Bank of the West acquisition.
Loan provisions, however, are likely to jump for most of the top banks, and will continue to grow in the third quarter, Refinitiv data showed.
Net income is expected to be a mixed bag, likely rising 5.7% for TD and 7% for BMO, while declining between 6% and 17% for the other four banks.
BMO and Scotia Bank (BNS.TO) are due to report earnings on Wednesday, while TD, Canadian Imperial Bank of Commerce (CM.TO) and Royal Bank of Canada (RY.TO) report on Thursday.
Keefe, Bruyette & Wood analyst Mike Rizvanovic projects a 28% increase in provision for credit losses from the prior quarter for the Big Six banks, driven by rising insolvencies and a push to build reserves.
