Uncertainty Over US Rates, Credit Card Debt Could Affect Canadian Bank Earnings

Several of Canada’s largest banks report earnings over the rest of the month, with Toronto-Dominion Bank (TD) opening the cycle Thursday, followed by others including Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Canadian Imperial Bank of Commerce (CM), and Royal Bank of Canada (RY).

In a note last Friday, Bank of America Securities analysts maintained “buy” ratings on the stocks of Bank of Montreal and Royal Bank of Canada (RBC), with “neutral” ratings on TD, Bank of Nova Scotia, and Canadian Imperial Bank of Commerce.

The analysts wrote that macroeconomic conditions are leading many investors to remain cautious toward bank stocks, given an uncertain inflationary and interest rate environment in the U.S. and abroad.

Interest Rate, Credit Card Uncertainty

As with the earnings of a number of the biggest U.S. banks last month, the Federal Reserve’s decision to postpone rate cuts until inflation reaches the central bank’s preferred level could cause some uncertainty for this month’s Canadian earnings reports, as well as projections for the rest of 2024.

“The market’s expectations for interest rate cuts have evolved significantly,” Canadian Imperial Bank of Commerce (CIBC) analysts wrote in a note last Thursday. “A higher-for-longer scenario has become a higher-probability scenario, particularly in the U.S.”

“On April 30, the market was pricing in 0-1 rate cuts in the U.S. 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,” the CIBC analysts said.

Another hurdle the CIBC and Bank of America analysts wrote about is the rise in credit card balances, which has been accompanied by higher delinquency rates. Recent data revealed that a growing number of people are carrying more credit card debt than any time since 2011.

In Canada, CIBC analysts noted that recent research shows renters hold 60% of all outstanding non-mortgage debt, but represent “close to 85% of serious delinquencies,” suggesting that those who own a home are more likely to be in a relatively secure financial position.

Acquisitions and Other Regulatory Hurdles

The Bank of America analysts noted multiple acquisitions that some of the Canadian banks have made recently will be a focus for investors, as the institutions could provide updates along with their earnings reports on the integration process along with other timing details for when systems will be merged.

The analysts noted that RBC is likely to provide new information on its acquisition of HSBC Bank Canada, which was completed March 28, in terms of an overall timeline for when the combination of the banks’ systems will be complete, and when HSBC will start adding to RBC’s financial performance.

At least one bank in the group, TD, also has another layer of regulatory concern that investors will be watching for more detail.

Earlier this month,The Wall Street Journal reported that a U.S. Justice Department probe into whether the anti-money laundering (AML) practices of multiple banks, including TD, may have failed to prevent laundering in multiple instances, including with money related to illegal drug sales in the U.S.

TD previously disclosed that it was a subject of probes into its anti-money laundering policies, but not that any of the probes involved drug money. Investors likely will be seeking more information on how long the investigations will take to resolve, as well as what impact they could have on TD’s business.