Canadian bank earnings will continue to be crimped by high borrowing costs and slower economic growth until central banks start cutting interest rates, analysts say.
“We believe that the Canadian bank earnings trends are close to an inflection point; last year’s triple whammy of higher minimum regulatory capital requirements, credit reserve building, and negative operating leverage from double-digit non-interest expense growth should moderate starting this quarter and improve through fiscal year 2025,” Bank of Montreal analyst Sohrab Movahedi said in a note to clients.
Canada’s lenders have been plagued by climbing provisions for credit losses – money that the banks set aside for loans that could default – as higher borrowing costs andThe provisions are a closely watched indicator of the pressure building on customer finances. Lenders have been ramping up loan loss reserves since late 2022, and relief depends on interest rates falling, which is expected to happen later this year.
Homeowners are also preparing to weather a spike in their mortgage payments when a wave of loans come up for renewal with higher interest rates over the next few years.