TORONTO (Reuters) - Investors and analysts are bracing for Canadian banks to be hit harder than they were during the global financial crisis despite stronger balance sheets, as a rapid drop in interest rates and a spike in unemployment pose challenges not seen in decades.
Canada’s biggest lenders — Royal Bank of Canada (RY.TO), TD Bank (TD.TO), Bank of Montreal (BMO.TO), Bank of Nova Scotia (BNS.TO), Canadian Imperial Bank of Commerce (CM.TO) and National Bank of Canada (NA.TO) — posted two years of average earnings declines during the 2008 crisis but emerged stronger than their U.S. counterparts, thanks to stricter lending norms and a resilient economy.
For performance during the financial crisis:
“This is a massive consumer and business recession... at a time when there’s too much corporate and consumer leverage,” said Bryden Teich, portfolio manager at Avenue Investment Manager, who is underweight the banks.
“We will probably see unemployment claims spike to levels we’ve never seen before... it’s going to be a very difficult environment for the banks.”
Canada’s six biggest lenders could post an average 32% decline in fiscal 2021 earnings if infections continue for an extended period, Canaccord Genuity analyst Scott Chan forecast, as loan loss provisions, credit growth and asset management and capital markets businesses fare worse than previously expected.
Canada’s economic heartlands of Ontario and Quebec provinces have shut down non-essential services for weeks to stop the spread of the virus, as the Canadian parliament on Wednesday approved C$27 billion ($18.9 billion) stimulus package.
Despite stimulus measures, loan originations are expected to fall as confidence evaporates, said Barclays analyst John Aiken, despite a drop in banks’ capital buffers. Aiken sees a 10% earnings decline in 2021.
Moody’s Vice President Jason Mercer expects to see increases in consumer and business defaults this time around, in contrast to the last recession.
An early glimpse of how bad the situation could get came last week, when Prime Minister Justin Trudeau said more than 500,000 Canadians had applied for employment insurance.
Epidemiologists have said social distancing needs to continue for months, if not longer, to avoid a resurgence, weighing on hopes for a quick recovery. (bit.ly/3ap8iuw)
James Shanahan, an analyst at Edward Jones, said the higher share of uninsured mortgages, which account for 69% of total lending up from 50% five years ago, pose additional risk.
Still, the lower loan-to-value ratios of uninsured mortgages, combined with six-month payment deferrals, will help limit losses, Mercer said.
“Banks were entering 2020 in a softer position anyway,” said Mark Narron, director at Fitch Ratings. “We don’t know the severity and duration of this crisis.”
($1 = 1.4310 Canadian dollars)
Reporting by Nichola Saminather; Editing by Denny Thomas and Lisa Shumaker