Canadian banks' quarterly profits seen pressured by higher bad-debt provisions

By Nivedita Balu

TORONTO (Reuters) - Canadian banks are expected to set aside money for challenging days, which will hurt quarterly earnings, as investors await commentary on how the lenders will navigate a prolonged high interest-rate environment that has dented credit growth.

The big six banks, which control about 90% of the total banking assets in the country, are expected to report this month a quarterly profit decline between 1% and 8%, driven by high provisions for bad loans. The exception is Canada's No. 1 bank, Royal Bank of Canada, whose recent acquisition of HSBC's domestic unit is expected to benefit the bank.

Some banks in the group - which includes TD Bank, Bank of Montreal, CIBC, Bank of Nova Scotia and National Bank of Canada - are also undergoing some management shakeups, with two new CFOs expected to address analysts in conference calls following the results.

TD Bank's results on Thursday will also reflect a provision in connection with U.S. investigations into its anti-money-laundering practices.

The high interest-rate environment has pressured consumers as they cope with higher mortgage and credit card repayments, in an already-inflationary landscape.

In 2024 and 2025, 2.2 million Canadian households, representing over C$675 billion ($495 billion) worth of mortgages held by the country's chartered banks, will have to renew their mortgages, a challenge if rates remain high as consumers could be stuck with higher monthly payments.

"Obviously, we wish we had more clarity on this particular (interest rates) issue. But we don't," said National Bank analyst Gabriel Dechaine. "What we do have is confidence in other factors that were previously sources of uncertainty, such as NIM performance and expense management."

Net interest income, or the difference between what lenders earn on loans and pay out for deposits, is expected to increase in a range between 0.2% and 4%, but the banks are setting aside more loan-loss provisions than last year.

In April, the Bank of Canada kept its key interest rate unchanged at a near 23-year high of 5% but the bank's head said a cut in June was possible if a recent cooling trend in inflation is sustained. Money markets are factoring in a 25 basis-point cut in June.

KBW analyst Mike Rizvanovic said that the "risks around mortgage renewals amidst stubbornly higher interest rates are likely to limit any meaningful multiple expansion."

Regulatory data through the first two months of the second quarter showed slowing loan growth, with weakness in the mortgage space.

Strong capital-markets profits last quarter gave investors a chance to heave a sigh of relief, a trend that will likely continue as league table data suggests improving underwriting activity.

"We are most interested in inflections in management commentary around both net interest income and credit as rate cut expectations continue to be pushed out," Canaccord Genuity analyst Matthew Lee said.

The banking index in Toronto has gained 5.5% so far this year, compared with the broader exchange's 7.2% gain.

($1 = 1.3618 Canadian dollars)

(Reporting by Nivedita Balu in Toronto; Editing by Matthew Lewis)