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The concern of a coming recession is likely to weigh on bank valuations and dampen the outlook for earnings ahead, Barclays analysts wrote in a note to clients on Tuesday.
"While we do not anticipate that the Canadian banks' second quarter will demonstrate much earnings weakness, we believe that cracks in the foundation will become evident," John Aiken, head of research (Canada) at Barclays, said.
These concerns caused Aiken to lower his ratings on three of Canada’s leading Big Six banks, the Bank of Nova Scotia, Royal Bank of Canada and TD Bank, while maintaining his positions on the remainder.
The top factors that could weigh on the banking sector amid this backdrop are credit losses and flat underwriting activity within the capital markets divisions.
“Should the hope of a ‘soft landing’ fade and weigh on consumer spending and business investment sentiment, the dampening effect it could have on lending, market activity, and earnings could continue to test bank valuations over the near term,” he said.
Despite the pullback, Aiken noted that Canadian banks remain safe with strong capital and reserve levels.
“While we continue to see long-term value in the Canadian banks and are not concerned with their solvency, we do anticipate near-term pressures will continue to mount and weigh on sentiment,” he wrote.