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    • Banks to give financial update in Q4 results ahead of possible recession next year

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    TORONTO -

    Canadian banks are set to reveal how they're faring in the lead up to a possible recession as they report quarterly earnings this week.

    As central banks raise interest rates to slow inflation, economic fears have held bank stocks back compared with the overall market, so analysts will be looking to see how well set up the sector is before an expected slowdown next year.

    Starting with Scotiabank reporting on Tuesday, the results will cover the three months ending Oct. 31. During that period, the Bank of Canada raised its key interest rate twice, bringing its key interest rate to 3.75 per cent. The central bank is expected to hike rates again at its last decision of the year on Dec. 7.

    Key questions for analysts will be on how much banks are profiting from their loans, measured in one way by the net interest margin, and what the chances are that some won't be able to pay those loans back, measured by how much money banks are setting aside for potentially bad loans.

    The core business of lending has become more important in recent quarters as the hit to the stock market has led to a retreat in profits for the wealth management side while the capital markets business of raising money for companies has also slowed over economic concerns but is starting to pick up.

    Rising interest rates have been a major source of pressure for equities, though November has so far shown good gains. Interest rates have also slowed the real estate market and mortgage demand, with home sales down 36 per cent in October compared with a year earlier, but banks have also been able to profit from those rising rates as shown by their net interest margins.

    "Margin expansion has been one of the more exciting developments in the banking space, partially offsetting recessionary concerns," said National Bank analyst Gabriel Dechaine in a note.

    Provisions on potentially bad loans will be another differentiator, especially since complex accounting rules make the measures an ongoing source of variable versus analyst consensus, said Scotiabank analyst Meny Grauman in a note.

    The financial buffers started creeping up last quarter after an extended stretch of banks winding down what they built up during the early part of the pandemic. While they will likely go up further this quarter, it's not a sign of concerns in credit conditions, which remain "pristine," said Grauman.

    "The bottom line is that those looking for proof of a recession in this latest batch of bank results will be sorely disappointed once again."

    He pointed to the latest jobs report that showed a big bounce back in employment after a summer lull, and a surge in wage growth, as a big support for the economy and bank performance.

    Given this is the last quarter of the year, analysts will also be pushing to see how banks see these key trends performing next year, said RBC analyst Darko Mihelic in a note.

    "Being year-end, it is usually a good time to press for guidance. Are we at or near peak net interest margins and peak loan growth? How high do provisions for credit losses go from here?"

    He said earnings per share will likely dip slightly from the third quarter but be up a year earlier, with strong loan growth from last year despite the dip in mortgages as commercial loans have remained strong. For next year, Mihelic said he's conservatively expecting earnings per share growth of 2.2 per cent, picking up to 4.4 per cent in 2024 as loan growth resumes and other factors stabilize.

    One thing analysts aren't expected to hear about from the banks is the question of who might buy HSBC's Canadian division, which could go for something in the realm of $10 billion after announcing in early October that it was shopping the asset around.

    "We do not expect any talk of HSBC on the quarterly calls, but it is the elephant in the room and certainly has capital implications for the winner," said Grauman.

    RBC and National Bank report on Wednesday, while BMO, CIBC and TD all report Thursday.

    This report by The Canadian Press was first published Nov. 27, 2022.

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