Canadian Banks Recognize Return Risk on Commercial Real Estate Loans, Focus on TD

TORONTO, May 22 (Reuters) – Canadian banks are expected to report higher loan loss provisions in this week’s earnings call, highlighting the risk of commercial real estate loans alongside the country’s second-largest bank TD. (TD. TO) Focus after First Horizon acquisition (FHN.N) We’re screwed.

Bay Street analysts cut their second-quarter earnings forecasts for Canadian banks, expecting higher expenses and slower loan growth as sub-border turmoil weighs on the banking sector broadly. . Still, investors see Canadian banks as safer options than U.S. banks because of their higher levels of capital.

Barclays analyst John Aiken said bank earnings for the second quarter to April 30 “cracks in the underpinnings will be evident.”

He expects bank valuations to come under pressure and confidence in earnings prospects to erode.

Aiken, who downgraded his outlook for the sector from “positive” to “neutral,” said management’s comments around credit and earnings will be central to investors’ minds.

“Unfortunately, we see more downside risk than upside risk,” he added.

Top banks are expected to see a 3% to 30% year-on-year increase in net interest income in the second quarter, with analysts expecting Bank of Montreal (BMO.TO) Became a top performer with its acquisition of Bank of the West.

But loan provisions at most top banks are likely to surge, and will continue to rise in the third quarter, according to Refinitiv data.

Net income is expected to be mixed, with TD up 5.7% and BMO up 7%, while the other four banks are expected to drop 6% to 17%.

BMO and Scotiabank (BNS.TO) TD, the Canadian Imperial Bank of Commerce is due to report earnings on Wednesday. (CM.TO) and Royal Bank of Canada (RY.TO) Thursday report.

Keefe, Bruyette & Wood analyst Mike Rizvanovic expects credit loss provisions at the six largest banks to rise 28% quarter-on-quarter as bankruptcies rise and a drive to build reserves.

TD management expected to face questions from analysts after media report It said a $13 billion deal with U.S. financier First Horizon failed because of the bank’s anti-money laundering practices. In response, TD said it was working to prevent criminals from using its banks for illegal activities and to strengthen its risk management program.

Investors are watching how the financial firm plans to use its estimated $20 billion in excess capital.

“The excess capital will ease investor concerns about capital adequacy and give TDs the option again,” CIBC analyst Paul Holden said.

Holden expects TD and the National Bank of Canada to raise their dividends by about 5%, while other banks will raise them by nearly 3%.

TD is the worst performer among the big Canadian banks, down about 6% since the start of the year, and BMO is down about 3% over the same period. RBC, CIBC, National Bank (NA.TO) and Scotiabank rose between 0.5 and 12 percent.

Canadian Bank Stocks Are Significantly Underperforming TSX Canadian Bank Stocks Are Significantly Underperforming TSX

Vacant offices in big cities have raised concerns among investors about banks’ exposure to commercial real estate loans, as about 10% of the big six banks’ loan portfolios are tied to commercial real estate. As more and more companies choose the hybrid work model, the utilization rate remains at his 50% level.

Reuters Graphics

The Bank of Canada also said there were growing concerns about households’ ability to service their debts, and there were signs of economic stress for some homebuyers.

Reported by Nivedita Bal of Toronto.Additional reporting by Menaz Yasmin of Bengaluru, Editing by Deepa Babington

Our criteria: Thomson Reuters Trust Principles.

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