Canadian bank earnings: What to expect while waiting for rate cuts?

Federal Reserve rate cut uncertainty clouds outlook for Canadian bank quarterly financials

Canadian bank earnings: What to expect while waiting for rate cuts?

Several major Canadian banks are set to report earnings this month, but their financial performance may be overshadowed by uncertainty surrounding the timing of US Federal Reserve interest rate cuts, Investopedia reported.

Several of Canada's largest banks, including Toronto-Dominion Bank (TD), Bank of Montreal (BMO), Bank of Nova Scotia, Canadian Imperial Bank of Commerce (CIBC), and Royal Bank of Canada (RBC), are set to unveil quarterly financials.

Bank of America Securities analysts noted that "macroeconomic conditions are leading many investors to remain cautious toward bank stocks, given an uncertain inflationary and interest rate environment in the US and elsewhere."

This sentiment is echoed by CIBC analysts, who acknowledged the growing likelihood of a "higher-for-longer" interest rate scenario, particularly in the US.

"The market’s expectations for interest rate cuts have evolved significantly," CIBC analysts wrote in a note last Thursday.

"On April 30, the market was pricing in 0-1 rate cuts in the US by the September meeting, while expectations in Canada still hovered around 1-2 rate cuts. We have revised our NIM (net interest margin) assumptions, particularly for F2025, to assume fewer rate cuts.”

Another potential headwind is rising credit card delinquencies amid higher consumer balances. "Recent data revealed that a growing number of people are carrying more credit card debt than ever since 2011," the report stated.

Read next: Canada can cut rates – even if the US doesn't, says TD Bank                  

The delay in Fed rate cuts, coupled with rising credit card balances and higher delinquency rates, could impact both earnings reports and projections for the remainder of 2024.

CIBC analysts pointed out that renters, who hold 60% of all outstanding non-mortgage debt in Canada, account for "close to 85% of serious delinquencies," suggesting that homeowners are generally in a more stable financial position.

Bank acquisitions and regulatory scrutiny are also in focus. Investors anticipate updates from RBC on integrating its HSBC Bank Canada purchase. TD faces a US probe into whether its anti-money laundering practices allowed the laundering of drug proceeds, raising business impact concerns.

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