Canada’s big banks plunge more than 20% from an all-time high on recession fears

Analysts warn earnings may not be as strong going forward

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Canadian banks fell more than 20 percent from their all-time high set in early February as recession fears send investors fleeing.

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The S&P TSX Financial Sector Index and the S&P/TSX Commercial Banks Index, which tracks the country’s eight largest lenders, fell on Thursday, adding to another day of losses after inflation in Canada rose to a four-decade high and US data pointed to an increase. unemployment and the fall in manufacturing activity and services.

Toronto-Dominion Bank, Canada’s second-largest lender, led the losses, falling as much as 3.6 percent to its lowest point in nine months. Canadian Imperial Bank of Commerce and Bank of Nova Scotia fell as much as 3.4% and 3.3%, respectively.

The commercial bank index peaked on Feb. 8 and was one of the best performers in the S&P TSX Composite Index before soaring as Russia launched its war in Ukraine on Feb. 24 and central banks warned of a possible economic downturn.

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Analysts warn that earnings may not be as strong going forward. Canadian banks’ earnings estimates for 2023 could fall 16 percent on average in the event of an economic downturn, according to RBC Capital Markets. Scotiabank and CIBC are among the Big Six bank stocks leading losses this year. Both banks, Canada’s third and fifth largest banks, could fall further as they rebuild loan loss provisions previously released when pandemic restrictions ended earlier this year.

Scotiabank’s core earnings per share for 2023 could fall by the group’s maximum by 22.5 percent, RBC analyst Darko Mihelic said in a note to clients on Tuesday. The bank has released the group’s highest-yielding reserves, while the Bank of Montreal and the National Bank of Canada would be the least affected, with each bank’s core EPS estimates falling 12.6 percent.

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“NA and BMO would be good defensive stocks to own heading into a recession,” Mihelic said. “BNS and CM would likely see further declines in earnings and some dismay around Canadian housing and generally higher concerns about credit losses.”

Inflation in Canada rose to 7.7 percent in May, reaching its highest point in 40 years, Statistics Canada said on Wednesday. The jump reinforces expectations that the Bank of Canada will offer aggressive rate hikes next month.

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Still, Canada’s banking regulator on Wednesday left a key capital requirement for large lenders unchanged, signaling it believes banks can absorb potential losses even as economic risks mount.

Investors prefer banks that start building their reserves ahead of time, Mihelic said.

“Banks that proactively start accumulating reserves before their peers will be rewarded as long as there are no bank-specific issues causing reserve accumulation,” he said.

As fears of a recession mount and Canada’s housing market cools, analysts including those at Barclays and Desjardins have been cutting their price targets on the country’s biggest lenders. Since the beginning of March 4, the average price target on the commercial bank index fell 6.3 percent, and CIBC’s target fell 9.7 percent.

Bloomberg.com

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