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Earnings Reports from Canadian Banks Paint a Concerning Picture Amid Commercial Property Loan Risks

As Canadian banks prepare to report their earnings, there is a rising concern over the impact of commercial property loans on their financial health, with TD Bank taking center stage.

TD Bank sign
TD Bank sign

Growing Concerns Over Canadian Bank Earnings Amid US Turmoil

Analysts predict Canadian banks will report an increase in bad debt provisions in the coming week, highlighting the risks associated with commercial property loans. This comes after TD Bank's failed acquisition of First Horizon (NYSE: FHN), making the country's second-largest bank a particular focus. Analysts have tempered their Q2 earnings expectations, anticipating higher expenses and a slowdown in loan growth due to economic turbulence in the United States. Despite these concerns, Canadian banks are still considered safer investments than their American counterparts, largely due to their robust capital levels.

Bank Earnings Predicted to Show Weakness, Analysts Warn

Barclays (LON: BARC) analyst John Aiken forecasts noticeable weaknesses in the second quarter bank earnings. He foresees a drop in bank valuations and dwindling confidence in their earnings projections. In light of these considerations, Aiken has revised his outlook for the sector from 'positive' to 'neutral,' suggesting that management's remarks about credit and revenue will be of significant interest to investors.

Mixed Predictions for Q2 Earnings, Loan Provisions in Focus

Top banks are expected to showcase a varied net interest income growth ranging from 3% to 30% for the second quarter compared to last year. However, loan provisions are anticipated to increase across the board, continuing this trend into Q3, according to data from Refinitiv. Analysts project net income to rise for TD and BMO by 5.7% and 7%, respectively, while a drop of 6% and 17% is expected for the remaining four major banks.

Bank of Montreal
Bank of Montreal

Anticipation Builds as Big Six Banks Prepare to Report Earnings

Bank of Montreal (BMO) and Scotia Bank are slated to report earnings on Wednesday, followed by TD, Canadian Imperial Bank of Commerce, and Royal Bank of Canada on Thursday. Analyst Mike Rizvanovic from Keefe, Bruyette & Woods foresees a 28% surge in provisions for credit losses compared to the previous quarter for the Big Six banks, primarily due to increasing insolvencies and efforts to bolster reserves.

TD Bank in the Hot Seat Over Failed Acquisition, Practices

Following media reports alleging that its anti-money laundering practices led to the downfall of a $13 billion deal with US lender First Horizon, TD Bank is expected to be in the crosshairs. Investors are eager to know how the bank plans to leverage the estimated $20 billion in excess capital it possesses.

Canadian Banks' Dividend Projections Amid Earnings Concerns

Paul Holden, a CIBC analyst, predicts TD and the National Bank of Canada (OTC: NTIOF) will raise their dividends by about 5%, while the rest of the major banks will likely increase theirs by around 3%.

Stock Performance of Major Canadian Banks Amid Challenges

TD's stock performance trails behind its counterparts, with a decrease of about 6% this year. BMO follows with a 3% loss, while RBC, CIBC, National Bank, and Scotia Bank have seen gains between 0.5% and 12%.

Fears Over Commercial Property Loan Exposure Intensify

The growing trend of empty offices in major cities has heightened investor anxiety over banks' exposure to commercial property loans. Around 10% of the Big-6 banks' lending portfolio is tied to commercial real estate. The Bank of Canada also expressed increased concern over households' ability to pay off their debts, noting signs of financial stress among some homebuyers.