Canadian Banks: Preparing for higher PCLs
Financials
Shalabh Garg attempts to quantify the performing loan provisions that Canadian banks might build over the coming quarters. He uses the banks' response to macroeconomic uncertainty in the early days of the pandemic as a reference point for provisioning built through the reclassification of some Stage 1 loans to Stage 2 under IFRS 9 and an increase in the allowances for credit losses ratio for both Stage 1 and 2 loans. Shalabh believes RBC and TD, followed by Scotiabank and CIBC, will likely undertake substantial performing provisions for credit losses over the coming quarters if trade policy uncertainty persists. He does not expect impaired PCLs to spike in the near term, unless economic conditions deteriorate materially and drive the unemployment rate higher. He believes valuations will come under further pressure only when impaired PCLs ramp up.
Edition: 210
- 02 May, 2025
Canadian Banks
Financials
Rising risks trump rising rates - Nigel D’Souza expects market sentiment to shift over the coming months as slowing economic growth and elevated credit risk outweighs the benefit of higher NII. Ahead of this inflection point, Nigel is lowering his sector forward P/E multiple for Canadian banks to 10.6x (NB assuming a pre-pandemic PCL ratio, it currently stands at 13.5x, the highest multiple since the GFC). He downgrades Scotiabank, CIBC, National Bank, RBC and TD Bank to Sell. If you are taking money off the table in banks, consider moving it to the insurers. Nigel continues to pound the table on Manulife Financial and recently upgraded Sun Life and Great-West Lifeco to Buy.
Edition: 129
- 18 February, 2022