Canada's banks may be overestimating the quality of their credit, says analyst – Financial Post

Almost half of earnings beats could be based on ‘false signal’
Author of the article:
Canadian banks delivered surprisingly good earnings last week because of lower-than-expected credit losses. They’ll find it harder to repeat that feat in the near future, according to National Bank of Canada.

Five of country’s six largest banks beat earnings-per-share forecasts by an average of 8 per cent, analyst Gabriel Dechaine said in a note to clients. Nearly half of the outperformance was due to low provisions for credit losses, he said. The exception was Canadian Imperial Bank of Commerce, which set aside $303 million in PCLs, more than analysts had projected.

Dechaine said he thinks CIBC is merely “ahead of the curve” and other banks may find themselves boosting provisions as economic risks rise. The Bank of Canada, the U.S. Federal Reserve and other central banks are tightening monetary policy to cool inflation.

“Unless recession risk goes away, this quarter was a false signal” of credit quality in banks, Dechaine wrote. “We believe that positive credit surprises could turn into negative ones, especially if recessionary probabilities increase.”

Royal Bank of Canada, the country’s largest lender, had a major positive credit surprise, releasing $342 million in provisions for the quarter ended April 30. Analysts had estimated the bank would set aside $241 million in PCLs.

What Bloomberg Intelligence Says…

Increases in provisions for credit losses (PCLs) at Canadian banks are trending slower than expected in 2022, with normalization largely delayed until 2023, based on our analysis and consensus….The banks have said geopolitical risk and rising rates may slow economic growth, yet strong credit quality after government support programs allowed them to release more pandemic reserves.

— Paul Gulberg and Ethan L Kaye, analysts

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