JPMorgan Chase & Co. surprised Wall Street Wednesday by setting aside nearly US$1 billion for potential loan losses in its fiscal first quarter. That move also caught the eye of a Canadian banks analyst, who was left wondering whether profit expectations for those institutions are out of whack.
"In short, we believe the sector still has downside risk heading into [fiscal second-quarter] earnings in late May," wrote Gabriel Dechaine, who covers the banks for National Bank of Canada Financial Markets, in a report to clients Wednesday night.
"In the current context of geopolitical uncertainty and the increased probability of a recession (or stagflation), we believe banks may be compelled to take a more conservative stance with regard to the pace of performing [allowances for credit losses] releases."
By Dechaine’s math, Canada's big banks set aside close to $13 billion early in the pandemic as they braced for a feared tidal wave of loan losses. But that onslaught of bad loans never materialized as government support programs and other extraordinary efforts helped insulate Canada's economy from an even worse fate as COVID-19 took hold.
As COVID gradually loosened its grip on the economy, the banks benefitted handsomely as they freed up billions of dollars that had been set aside.
But JPMorgan's decision to book US$902 million in reserves in its latest quarter, reducing per-share profit by US$0.23, gave Dechaine pause. Indeed, the Wall Street giant pointed to macro factors ("downside risks due to high inflation and the war in Ukraine," it said in a release) that Canada's banks aren't immune to.
Just last month, Dechaine cut his estimate for the sector-wide release of loan-loss provisions by 40 per cent. Now, however, he's taking an even more cautious view.
"We cannot rule out the possibility of banks reversing course entirely and resuming the trend of additions to the performing [allowances for credit losses]," he stated in his latest report.
Dechaine said Bank of Nova Scotia, Bank of Montreal, and Toronto-Dominion Bank are his top candidates to retain their provisions based on their footprints outside of Canada.
Despite the murky outlook for credit quality, Dechaine noted that consensus profit estimates for the Big Six have been steady. Though he pointed out his outlook for earnings per share are below the broader view among his peers.
"With the world having become much more unpredictable and with clear signs of business deterioration in capital markets segments, you’d think consensus expectations would have become much more downcast," he wrote.
Dechaine has outperform (the equivalent of a buy) recommendations on Royal Bank of Canada and Canadian Imperial Bank of Commerce. He has sector perform (the equivalent of hold) ratings on TD, BMO, and Scotia. He doesn't have a rating on National.
Advertisement