Banks to report second-quarter results as credit concerns persist

Canadian banks are preparing to release their second-quarter results, following a period of economic stability. This quarter contrasts sharply with a year ago when U.S. and Swiss bank failures caused widespread concern. At that time, the possibility of a severe economic downturn loomed as central banks raised interest rates to combat inflation.

In the latest quarter, despite issues at TD Bank Group regarding money-laundering controls, the economic outlook has been relatively stable. Positive news included Statistics Canada reporting a drop in inflation to 2.7% in April, down from 2.9% in March. This boosted market speculation that a rate cut in June is possible, although the timing and pace remain uncertain. 

One significant focus for analysts is the credit quality of bank loans, particularly as many Canadian mortgages are up for renewal at much higher rates. RBC analyst Darko Mihelic noted that while bank earnings are expected to dip compared to last quarter and last year, credit quality remains a primary concern. He highlighted ongoing signs of credit deterioration and the challenges posed by mortgage renewals.

The Bank of Canada recently reported that some borrowers face payment increases of over 60% upon mortgage renewal. Despite this, homeowners seem to be managing well. Residential mortgage impairment rates were at 0.34% in the first quarter, lower than pre-pandemic levels. However, strain is increasing, especially on smaller banks that cater to higher-risk borrowers.

Analysts, including Canaccord Genuity’s Matthew Lee, are looking for insights into profit margins and credit conditions. Lee anticipates cautious commentary from banks as consumers face tougher economic conditions.

Scotiabank’s Meny Grauman expressed broader concerns about the Canadian economy, citing issues like declining productivity, unsustainable fiscal policies, and an expensive housing market. He questioned whether the "Canadian economic miracle" is over, a factor that could influence bank performance in the long term.

As Canadian banks navigate these challenges, the overall health of consumers and the economy remains a crucial consideration.