Banks about to enter eye of the storm

Slow earnings expected as banks stockpile capital before interest-rate rise boosts margins

Canada’s Big Six are expected to have set aside $1.17 billion to protect against bad loans last quarter

Canada’s banks are expected to post their slowest earnings growth in almost two years as the darkening economic outlook prompts them to stockpile capital before increases in interest rates start improving their lending margins.

Net income at the country’s six largest lenders is projected to have risen 3.4 per cent in the quarter through April.

That would be the smallest yearover-year gain since average profit fell 18 per cent in the third quarter of 2020.

Fiscal second-quarter results kick off Wednesday with reports from Bank of Nova Scotia and Bank of Montreal.

Rate hikes this year have started to slow the nation’s housing market, which accounted for most of the banks’ loan growth during the pandemic, while doing little so far to boost what lenders are able to charge their borrowers.

With the prospect of a rapid tightening cycle rattling markets and reducing economic-growth forecasts, the banks are expected to set aside more money to protect against potential loan losses, restraining their earnings growth.

“Based on how the market has shifted in terms of greed versus fear over the last three months, expectations are that the banks are going to be a bit more heavily weighted toward a negative economic scenario,” John Aiken, an analyst at Barclays Plc in Toronto, said in an interview.

Canada’s Big Six are expected to have set aside $1.17 billion to protect against bad loans last quarter. That would be more than three times the $373 million they set aside in the fiscal first quarter.

The banks had released provisions in the two quarters before that.

However, analysts have consistently overestimated banks’ level of caution on the credit front in recent quarters.

The banks’ first-quarter provisions came in at about 40 per cent of what analysts had forecast. A similar overestimation of provisions this quarter would boost banks’ earnings beyond analysts’ current projections.

Looking ahead to the rest of the year, additional interest-rate increases are expected to boost banks’ net interest margins.

Markets are pricing in a 50-basispoint rate hike by the Bank of Canada next month, bringing its policy rate to 1.5 per cent. That figure is expected to reach 2.75 per cent by the end of this year.