Commercial property loan risk set to impact Big Six financial results

Canada's top banks will release their latest earnings this week

Commercial property loan risk set to impact Big Six financial results

Canadian banks are likely to announce an increase in bad debt provisions and highlight the risks associated with commercial property loans as they release their earnings reports this week.

Attention will be focused on TD, the country's second-largest bank, following the failure of its acquisition of First Horizon.

Bay Street analysts have adjusted their expectations for the banks' second-quarter earnings, anticipating higher expenses and slower loan growth due to challenges in the broader banking sector, particularly in the United States.

Despite these concerns, Canadian banks are still considered safer investments compared to their American counterparts due to their robust capital levels.

Analysts have expressed cautious sentiments about the upcoming bank earnings, with Barclays analyst John Aiken predicting to Reuters cracks in the banks' foundation will become apparent.

He expects pressure on valuations and a decline in confidence regarding earnings outlook.

Aiken has downgraded his sector outlook from "positive" to "neutral," emphasizing that management commentary on credit and revenue will be pivotal for investors.

While net interest income growth is projected to range from 3% to 30% for the second quarter compared to the previous year, loan provisions are anticipated to surge for most of the major banks, and this trend is likely to continue into the third quarter, as per Refinitiv data.

Net income results are expected to vary, with TD and BMO likely to experience modest growth (5.7% and 7%, respectively), while the other four banks may witness declines ranging from 6% to 17%.

BMO and Scotiabank are scheduled to report their earnings on Wednesday, followed by TD, Canadian Imperial Bank of Commerce (CIBC), and Royal Bank of Canada (RBC) on Thursday.

Reuters said analyst Mike Rizvanovic from Keefe, Bruyette & Wood projects a 28% increase in provisions for credit losses compared to the previous quarter for the Big Six banks, driven by rising insolvencies and efforts to bolster reserves.

TD's management will face inquiries from analysts regarding recent media reports suggesting that the bank's anti-money laundering practices derailed its $13 billion deal with US lender First Horizon.

TD has responded by emphasizing its commitment to preventing illegal activities and strengthening risk management programs. Investors are eager to learn how the bank plans to deploy its estimated $20 billion in excess capital.

CIBC analyst Paul Holden believes that TD and National Bank of Canada will raise their dividends by around 5%, while other banks are expected to increase theirs by closer to 3%.

TD has been the weakest performer among major Canadian bank stocks this year, experiencing a 6% decline, while BMO has lost around 3%.

Conversely, RBC, CIBC, National Bank, and Scotiabank have seen gains ranging from 0.5% to 12%.

Investor concerns have been raised about banks' exposure to commercial property loans, given the prevalence of vacant offices in major cities.

Approximately 10% of the lending portfolio of the Big Six banks is tied to commercial real estate, and with occupancy rates hovering around 50% as more companies adopt hybrid work models, these concerns have amplified.