The S&P/TSX Composite Commercial Banks Index, which tracks Canada’s eight largest lenders, dropped 3.8 per cent Thursday, the biggest drop since June 2020, after JPMorgan Chase & Co. and Morgan Stanley posted results that pointed to deteriorating prospects for the world’s largest economy.
Royal Bank of Canada, the nation’s largest lender, sank 5.6 per cent, the most since March 2020 when the pandemic devastated markets. It has plunged 20 per cent since its record high in January. Bank of Nova Scotia and Toronto-Dominion Bank slumped as much as 3 per cent and 2.1 per cent respectively. Canadian lenders are due to report earnings next month.
“The knock-on effect to Canada has been much more significant than I would have expected,” AGF Investments vice-president and portfolio manager Mike Archibald said in an interview. “Canadian banks are down as much or more than the U.S. banks, more depending on which one you’re looking at. There’s a lot of uncertainty around what the economic environment could look like over the next six to 12 months.
The two U.S. banks reported worse-than-expected second-quarter earnings, with JPMorgan suspending share buybacks to bolster its capital buffer. It also added US$428 million for potential sour loans, reflecting “a modest deterioration in the economic outlook.” Meanwhile, Morgan Stanley investment banking revenue plunged 55 per cent, more than the 47 per cent that analysts predicted, as capital markets activity slowed.