Real estate loans a ‘question mark’ for Canadian banks’ profits

WITH most of Canada’s greatest banks uncovered to the US commercial-property market, the deteriorating high quality of some actual property loans might result in nasty surprises as lenders report fiscal first-quarter outcomes this week.

Commercial-property lending accounts for about 10 per cent of the mortgage books on common at Canada’s 5 largest banks. With the sector underneath strain amid elevated rates of interest and plunging valuations, banks have been reserving greater provisions for potential credit score losses for a number of quarters now.

The idiosyncratic nature of which specific loans might go unhealthy makes it exhausting to foretell the dimensions of coming provisions, mentioned Nigel D’Souza, an analyst with Veritas Investment Research Corp. While home-price indexes and an array of month-to-month knowledge present perception into the well being of residential mortgages, there’s no equal for business loans, leaving traders higher-level classes of publicity and making educated predictions, he mentioned.

The “US is probably more vulnerable than Canada, office is more vulnerable than other categories, and you are seeing some weakness creep into multifamily residential as well, and that could become an issue both in the US and in Canada,” D’Souza mentioned in an interview.

Unlike some US regional gamers, Canadian banks aren’t going through a solvency subject over commercial-loan losses, however they are going to be a “question mark” for profitability, D’Souza mentioned.

“Provisions have an outsized impact on and contribute to a lot of volatility,” he mentioned, including that different line objects, resembling margins, mortgage balances and income from charges, don’t transfer round considerably from quarter to quarter. “But credit provisions do.”

Provisions are more likely to maintain heading greater this quarter, “albeit at a more modest pace than last year,” Bank of Nova Scotia analysts Meny Grauman and Felix Fang mentioned in a report this month.

“We also expect some lumpiness from banks’ US office exposures, even though those exposures are quite small when measured as a share of total loans,” they wrote.

Analyst forecasts compiled by Bloomberg predict that fiscal first-quarter adjusted earnings per share for Canada’s six greatest banks will likely be up by a mean of 9.1 per cent from the earlier three months, and little modified from a 12 months earlier.

The Canadian banks start reporting on Tuesday (Feb 27) with Scotiabank and Bank of Montreal, adopted by Royal Bank of Canada and National Bank of Canada on Wednesday and Canadian Imperial Bank of Commerce and Toronto-Dominion Bank on Thursday. 

Scotiabank has little or no publicity to the US workplace market, in accordance with Lidia Parfeniuk, director at S&P Global Ratings in Toronto. But Royal Bank, Toronto-Dominion, Bank of Montreal and CIBC all have US mortgage books which might be more likely to be the topic of continued scrutiny as quarterly earnings are reported.

The high quality of CIBC’s US workplace loans, that are solely about 2 per cent of its whole portfolio, has been a serious theme for traders in current months and will likely be carefully watched this week.

“We believe investors will remain focused on CRE-related losses, where CIBC has been a consistent outlier the past few quarters due to its US office portfolio,” Keefe, Bruyette & Woods analysts Mike Rizvanovic and Abhilash Shashidharan mentioned in a notice to purchasers this month.

“Given what happened to New York Community Bancorp, there will certainly be more market attention of this portfolio in particular, but we expect the maturity profile of the book to be more manageable by next year,” wrote the Scotiabank analysts, who upgraded their ranking on CIBC to sector outperform, equal to a purchase, from sector carry out, their model of maintain. BLOOMBERG