FILE PHOTO: A collection of images showcases the headquarters of major Canadian banks—RBC, CIBC, BMO, TD, and Scotiabank—located in Toronto. (Source: Reuters)
Canadian banks are bracing for a mixed fourth quarter as attention shifts to their strategies for navigating mortgage renewals and potential interest rate cuts in the coming year. Analysts predict that four out of the six largest banks—Royal Bank of Canada (RBC), TD Bank, Bank of Montreal (BMO), CIBC, Bank of Nova Scotia (Scotiabank), and National Bank—will report earnings growth, while TD and BMO may see declines.
Year of Challenges and Gains
The past year presented hurdles for these financial giants, which control over 90% of Canada’s loans and deposits. Rising costs of living and high interest rates forced many borrowers to struggle with repayments, prompting banks to allocate additional funds to cover bad loans. Despite these obstacles, a focus on profitability has emerged in recent quarters, driven by easing interest rates, controlled expenses, cautious lending, and robust investment banking activity.
A Closer Look at Earnings
Net income growth among the big six banks is expected to range between 2% and 32% for the quarter, except for TD and BMO, which are projected to see earnings fall between 3% and 18%. Challenges such as TD's anti-money laundering issues and BMO’s problematic U.S. loan portfolio have weighed on their performance. Meanwhile, Scotiabank’s ongoing turnaround and National Bank’s acquisition of Canadian Western Bank are receiving positive attention.
Stock Market Movements
This year has seen significant fluctuations in bank shares. CIBC emerged as a top performer with a 47% gain, followed by RBC, Scotiabank, and National Bank, whose shares rose between 6.8% and 40%. In contrast, TD Bank’s shares have dipped nearly 3%, influenced by its $3 billion penalty to U.S. regulators over anti-money laundering failures.
Mortgage Renewals and Customer Choices
Mortgage renewals are set to take center stage as an estimated CAD 315 billion in mortgages come up for renewal in 2025, with an even higher volume expected in 2026. Many borrowers with variable-rate mortgages face the challenge of negative amortization, where payments don’t cover accrued interest. Banks have taken steps to ease the burden on customers by offering solutions like lump-sum payments or other payment options.
Potential Competition Ahead
Analysts warn that despite the Bank of Canada's interest rate cuts, which have lessened the risk of mortgage payment shocks, the competition among lenders could intensify. Borrowers seeking better rates may switch lenders, putting additional pressure on banks to maintain competitive offers while managing the risks of mortgage delinquencies.
Looking Forward
As Canadian banks report their Q4 earnings, their strategies for tackling these challenges will be scrutinized. Analysts agree that the focus has shifted from current performance to the outlook for the coming year, particularly regarding loan growth, capital market revenue, and loan loss provisions.
