Large Canadian Banks Q2 2023 Earnings Round-Up: PCLs Ramp Up, Driven by Weakening Credit Quality and Macroeconomic Concerns
The Big Six Canadian banks have faced a challenging operating environment and headwinds from persistent inflation, higher interest rates, heightened macroeconomic uncertainty, and U.S. regional banking sector turmoil. As a result, Q2 2023 sequential earnings were negatively affected by a surge in provisions for credit losses (PCL), along with lower revenues resulting from moderating loan growth, rising funding costs, and a continued challenging environment for capital markets and wealth management businesses. Specifically, aggregate quarterly adjusted earnings decreased 11% quarter over quarter (QOQ). Credit metrics continued to normalize from unsustainably low levels, although the QOQ ramp-up in PCLs in Q2 2023 was higher than DBRS Morningstar expected. Meanwhile, the net interest margin (NIM) modestly contracted QOQ with an aggregate average decrease of 3 basis points.Key highlights include:
-- Q2 2023 sequential earnings were negatively affected by lower revenues and rising PCLs, as concerns mounted related to loan risks and the overall health of the economy.
-- Credit quality continued to normalize in Q2 2023 from unsustainably low levels. A potential recession, combined with materially higher borrowing costs for creditors, would likely amplify credit deterioration beyond normalized levels.
-- NIM expansion and lending volumes are expected to moderate during the remainder of F2023, along with a continued ramp-up in PCLs, dampening earnings growth. The Big Six, however, remain well positioned with sound liquidity and adequate capital levels.
“DBRS Morningstar expects to see further deterioration in asset quality metrics in the second half of F2023 from these still unsustainably low levels. The household debt-to-disposable income ratio improved to 180.5% in calendar Q4 2022 from 184.3% in the prior quarter but remains elevated. Canada's household debt as a percentage of its GDP is the highest of any G7 country and is the only one above 100%, making Canadians more susceptible to interest rate hikes and more vulnerable to any potential increase in unemployment,” said Carl De Souza, Senior Vice President, North American FIG. “The Bank of Canada's recent June increase in its overnight rate by 25 bps will further increase borrowing costs, likely amplifying credit deterioration in the second half of F2023.”
Bank of Montreal is a financial services organization. Co. provides a range of retail banking, wealth management and investment banking products and services. Co. serves its clients through three operating groups: Personal and Commercial Banking, which provides financial services to personal and commercial customers; Private Client Group, which provides wealth management products and services to individuals and select institutional segments; and BMO Capital Markets, which provides clients financial and capital markets services to corporate, institutional and government clients.
Scotiabank is a financial services provider in North America, Latin America, the Caribbean and Central America, and parts of Asia. Through its three operating segments: Canadian Banking, International Banking, and Global Banking and Markets, Co. provides a range of advice, products and services, including personal and commercial banking, wealth management and private banking, corporate and investment banking, and capital markets. As of Oct 31 2017, Co. had total assets of C$915,273 million and total deposits of C$625,367 million.
Canadian Imperial Bank of Commerce is a financial institution. Through its three business units, Co. provides a range of financial products and services to individual, small business, commercial, corporate and institutional clients in Canada and around the world. Co.'s Retail and Business Banking business unit provides financial advice, products and services. Co.'s Wealth Management business unit provides integrated advice and investment solutions. Co.'s Capital Markets business unit provides integrated credit and global markets products, investment banking advisory services and research. As of Oct 31 2017, Co. had total assets of C$565.26 billion and total deposits of C$439.71 billion.
National Bank of Canada is a provider of financial services that include banking and investment solutions for individuals and businesses as well as securities brokerage, insurance and wealth management services. Co. operates in three business segments: Personal and Commercial, which encompasses the banking, financing, and investing services; Wealth Management, which comprises investment solutions, trust services, banking services, lending services and other wealth management solutions; and Financial Markets, which encompasses banking services, investment banking services and financial solutions. At Oct 31 2017, Co. had total assets of C$245.83 billion and total deposits of C$156.67 billion.
Royal Bank of Canada is a financial services company that provides personal and commercial banking, wealth management services, insurance, investor services and capital markets products and services. Co. serves personal, business, public sector and institutional clients through offices in Canada, the U.S. and 37 other countries. Co. is organized into five segments: Personal and Commercial Banking, which is comprised of Co.'s personal and business banking operations, and its auto financing businesses; Wealth Management, Insurance; Investor and Treasury Services; and Capital Markets. As of Oct 31 2017, Co. had total assets of C$1.21 trillion and total deposits of C$789.64 billion.
Toronto Dominion Bank provides financial services. Co.'s segments comprised of: Canadian Retail, which include Canadian personal and commercial banking businesses, Canadian credit cards, TD Auto Finance Canada and Canadian wealth and insurance businesses; US Retail, which includes the US personal and commercial banking businesses, US credit cards, TD Auto Finance US, US wealth business and the Bank's investment its subsidiary, TD Ameritrade Holding Corporation; and Wholesale Banking, which provides a range of capital markets, investment banking, and corporate banking products and services. As of Oct 31 2017, Co. had total assets of C$1.28 trillion and total deposits of C$832.82 billion.
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