Toronto-Dominion Bank kicks off second quarter results for the Big Six banks on Thursday. Canadian bank stocks have risen by 3.4 per cent this year, underperforming the S&P TSX Composite Index.DARRYL DYCK/The Canadian Press
Canada’s banks are expected to continue grappling with higher loan loss reserves and lower borrowing activity as U.S. President Donald Trump’s trade war threatens to weigh on economic growth.
The country’s six largest lenders report earnings for the second fiscal quarter over the next week, and analysts say continuing trade and economic uncertainty will dampen loan demand and bolster provisions to cover debt that could default.
“It should not be a surprise that credit losses are expected to rise due to the tariff risks and modest economic deterioration, but the key question is the extent of the potential increase on performing loan reserves,” Bank of Nova Scotia analyst Mike Rizvanovic said in a note to clients. “Based on our conversations with management, we do not expect to see a substantial build.”
Investors will be looking for clues from the bank’s senior leaders on how well the lenders are managing rising financial stress among consumers and businesses, and the direction they expect the economy to take in the latter half of the year.
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Provisions for credit losses – money that the banks set aside for loans that could default – have stunted profits at Canada’s banks in recent years amid higher borrowing costs and inflation. The provisions are a closely watched measure of financial stress among customers.
“Although we anticipate that all the banks will bolster their credit allowances, we do not believe that the allocation will be uniform, and it will be telling how the market reacts to those that are at the high and low end of the spectrum,” Jefferies analyst John Aiken said in a note.
“The banks need to balance prudence (putting aside for losses expected to develop in a weakening economic environment) while not spooking investors by undercutting confidence in their loan portfolios.”
On Thursday, Toronto-Dominion Bank TD-T will be the first major lender to release earnings for the three months ended April 30. Next week, Scotiabank BNS-T will report results on Tuesday and National Bank of Canada NA-T and Bank of Montreal BMO-T will announce earnings on Wednesday. Royal Bank of Canada RY-T and Canadian Imperial Bank of Commerce CM-T will wrap up earnings week for the six biggest banks on Thursday.
Canadian bank stocks have risen by 3.4 per cent this year, underperforming the S&P TSX Composite Index’s TXCX 5-per-cent climb. The KBW Bank Index, which tracks U.S. lenders, has climbed 2.4 per cent this year, falling behind their Canadian counterparts.
Analysts expect lending to slow in the second quarter as borrowers hold off on big purchases and investments to wait out a possible deterioration in the economy. Loan growth had slowed in the first month of the quarter, according to February data from Canada’s banking regulator.
Since then, some bank economists have lowered their GDP growth forecasts, signalling that consumers and businesses could be further tightening their purse strings ahead of a potential downturn.
The banks’ capital markets divisions could be a bright spot for second-quarter earnings as market volatility boosts trading revenue, offsetting muted investment banking activity caused by tariff uncertainty.
“The quarter will likely be a continuation of many of the trends experienced earlier in the year with trading revenues demonstrating year-over-year strength (albeit less so than Q1), muted growth in the loan book, and large performing provisions booked to account for geopolitical volatility,” Canaccord analyst Matthew Lee said in a note.
“Overall, we believe Q2 will be more about what the banks say than do given that we are likely too early to feel the full impact of U.S. tariffs at this juncture.”