2024 prospects are 'terrible' as long as rates remain elevated, says analyst
With Canada’s Big Six banks posting decidedly mixed Q4 results over the past few days, the persistence of multi-decade-high interest rates will likely prove to be a significant damper on the institutions’ 2024 prospects.
Of the latest results, CIBC, RBC, and National Bank of Canada exceeded earnings estimates, while BMO, Scotiabank, and TD Bank missed.
“The outlook is terrible for the Canadian banks heading into 2024 unless mortgage rates and interest rates are cut,” according to Barry Schwartz, chief investment officer at Baskin Wealth Management.
“The problem is, there’s no earnings growth and the outlook for 2024 is most of the Canadian banks are going to report earnings declines.”
Schwartz is anticipating a resurgence in earnings results as 2025 draws nearer, but only if the central bank finally decides to dial down its 5% benchmark policy rate.
Still, for long-term investors, some institutions’ stocks will continue to fare better than others.
“My favourites right now are Royal Bank and National Bank,” Schwartz told BNN Bloomberg. “They don’t have the type of exposure of some of the other Canadian banks, but good exposure to capital markets, which I’m always bullish on.”
Could 2024 see Canada’s top banks gobble up competitors?: Mergers and acquisitions saw a 'high, unprecedented level of activity' in Canada's banking sector in 2023— Canadian Mortgage Professional Magazine (@CMPmagazine) November 24, 2023
Read more: https://t.co/h0gnFJPmmu#mortgageindustry #lenders #mergersandacquisition #banknews
Mario Mendonca, managing director and senior financial services analyst at TD Securities, said that Canada’s largest banks should brace for increased credit losses due to mounting mortgage interest payments.
“What we are seeing from these higher mortgage payments… is delinquencies and gross impaired loans rising in other loan categories,” Mendonca told BNN Bloomberg. “That's what's going to cause credit losses to rise in 2024, and lead to weaker earnings growth.”
However, Mendonca isn’t expecting the mortgage sector to be a major factor in these losses.
“I don't believe the Canadian mortgage market is going to be the cause of significant stress for our Canadian banks,” he said.
“While I believe there’s some credit risk here, there is certainly normalization that's playing out in 2024… I don't fall into that Armageddon camp, where the Canadian mortgage market will necessarily cause materially higher credit losses for Canadian banks.”