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Canadian banks prepare for shaky economy, more bad loans

FILE PHOTO: The moon rises over the Toronto city skyline as seen from Milton, Ontario

By Nivedita Balu and Arasu Kannagi Basil

TORONTO (Reuters) - Canadian banks had a mixed fourth quarter but a common theme underlining all the reports was the rise in bad loan provisions, signalling that lenders were strapping in for a shaky economy.

While some delivered early Christmas presents to investors with better-than-expected profits, a forecast for more savings and improved cost-cutting measures, the overall bad loans provisions spiked to nearly C$4 billion ($3.0 billion) for the quarter, the highest since the pandemic era.

A common factor was also the prospect of the Bank of Canada (BOC) lowering interest rates next year, which could help consumers with mortgages at the time of renewal and help banks recover from a period of uncertainty.

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"The banks largely use these to manage expectations. They're focusing on cost savings, layoffs. So they need to give that backdrop and it's not an unreasonable backdrop," Verecan Capital's Colin White said.

Royal Bank of Canada, CIBC and National Bank comfortably beat analysts' estimates for adjusted earnings, while TD, Scotiabank and BMO missed. Regardless, provision for credit losses nearly doubled from a year ago.

"Given easing pricing pressures, we believe central banks have reached the end of the tightening cycle and will pivot to rate cuts in 2024 – albeit rates are expected to remain higher than pre-pandemic levels," RBC CEO Dave McKay told analysts, but warned of a slowing economy, citing signs of a decelerating labour market.

Other CEOs echoed those views while also cautioning about some turbulence next year.

Impaired loans related to residential mortgages, real estate and construction were also higher from the prior quarter, indicating that the banks were also being cautious when considering underwriting new loans.

Expenses were also higher as the big banks cut nearly 10,000 jobs globally, resulting in one-time severance costs along with other tech investments even as stock-based compensation increased.

"The message from all the banks is that ... the consumer is not in a strong position as they were in the previous couple of years. So it stands to reason that higher losses is something that you should expect," said Mike Archibald, portfolio manager at AGF Investments.

He noted that despite the mixed results, the banks reported healthy capital levels, giving investors assurance that the banks remain resilient.

"They're able to withstand a little bit more volatility in the loan book," he said.

($1 = 1.3559 Canadian dollars)

(Reporting by Nivedita Balu in Toronto; Editing by Mark Porter)