“The timing and amount of provisions taken are not necessarily consistent across the banks, as it depends on their business mixes, their individual macroeconomic forecasts, and any management adjustments made,” De Souza says.
On the aggregate, he says the Q3 earnings releases from the five banks that have reported earnings so far show increased provisions on their performing loans after several quarters of provision reversals going back to early fiscal 2021. CIBC was an outlier from that trend, he says, as it took provisions on performing loans in the prior quarter Q2 as the other banks halted provision reversals, making it the only bank among the five to report a reduction in total provisions this quarter.
Another overall trend that’s materialized, he says, are lower results in the banks’ capital markets businesses, which has been generally driven by lower underwriting and other advisory fees alongside lower trading revenue. The larger size of RBC’s capital markets business, he says, meant its earnings were more depressed relative to other banks in Q3.
“RBC will experience a little more volatility in its capital markets business, which could be positive or negative,” De Souza says. “In a positive time, when trading revenues are up and underwriting and advisory fees are hot, RBC would be an outlier to the positive relative to its Canadian peers.”
With the current macroeconomic uncertainty around inflation, interest rate increases, and potential recession, earnings could come under pressure in upcoming quarters. But as it stands, De Souza says Canadian banks are coming from a strong credit quality position to weather a looming negative credit cycle that includes risks from an economic downturn, decreasing home prices, and rising debt-servicing costs for individuals.
