Canada’s “Big Five” banks — TD (TSE:TD), CIBC (TSE:CM), RBC (TSE:RY), BMO (TSE:BMO), and Scotiabank (TSE:BNS) — have reported their highest provisions for loan losses since three years ago, reaching a collective C$3.37 billion in Q1 2023. This marks a significant 13x increase year-over-year, and it’s because of worries about a possible economic downturn and a rise in defaults within the commercial real estate industry.
Shifts in work routines, primarily the increase in remote and hybrid work models, have led to lower demand for office spaces. This decrease has put pressure on office rents and valuations. Moreover, rising interest rates have made it more expensive to service debt, adding to commercial real estate headwinds.
Despite these challenges, Canadian banks remain optimistic about their mortgage and personal loan sectors. They maintain this positive stance even as national housing authorities express concern about the country’s high household debt level, which is currently the most substantial among all G7 nations.
Unfortunately, most of these five key banks failed to hit projected profit targets, with only CIBC beating expectations. This shortfall from the other banks was primarily due to rising operational costs and dwindling revenues impacting their profitability. In contrast, large American banks have performed better, exceeding Wall Street’s profit expectations, thanks to increased borrowing costs boosting their net interest income.
Despite the recent turbulence, Canada’s banking sector is traditionally considered more stable and profitable than its American counterpart due largely to the dominance of a few key players. However, the sector’s struggle to meet profit expectations and the complexities of U.S. expansion plans are causing some instability. Even so, experts predict that Canadian banks will not rush to capitalize on any distressed U.S. lenders amid this economic uncertainty.
