‘Worst yet,’ the analysts wrote in a note to clients
The outlook for credit conditions appears to be deteriorating based on bank results released in the United States, which could stall the release of loan-loss provisions at Canadian banks, analysts at National Bank Financial are warning.
“Worst yet,” the analysts led by Gabriel Dechaine wrote in a note to clients late Wednesday, if economic conditions are indeed deteriorating, it could lead Canada’s big banks to a new “build” phase where they set aside more funds to cover loans they believe could be in trouble.
“In our view, banks with the most ex-Canada lending exposure could be under the most pressure to retain performing provisions,” Dechaine wrote in the note, which names Bank of Montreal, Bank of Nova Scotia, and Toronto-Dominion Bank.
BMO and TD, which have substantial lending operations in the US, are in an “interesting position” because they need to generate internal capital as part of planned acquisitions announced in recent months, the analysts said.
In the first quarter, JP Morgan highlighted the risks when it booked higher loan-loss provisions citing greater “downside risks,” the National Bank analysts said, adding that they don’t believe credit conditions have actually deteriorated, but rather that the outlook may have.
They noted that Canadian six largest banks have released $6.5 billion of performing allowances for credit losses since the first quarter of 2021.
“In the current context of geopolitical uncertainty and the increased probability of a recession (or stagflation), we believe banks may be compelled to take a more conservative stance with regard to the pace of performing ACL releases,” Dechaine wrote, adding that consensus expectations appear to be “lagging” in this respect.