A CIBC analyst has downgraded TD Bank as he forecasts upcoming risks for the banking sector ahead of fourth-quarter results expected in the coming weeks.

CIBC Capital Markets analyst Paul Holden downgraded TD from a buy rating to a hold rating on Tuesday, writing in a note to clients that he sees potential for negative updates from the bank when it reports fourth-quarter results on Nov. 30.

"We are downgrading TD due to upcoming risks with fourth-quarter earnings and are also cautious on the Bank of Nova Scotia (BNS),” he wrote. 

Scotiabank kicks off bank earnings season next week on Nov. 28. Laurentian Bank is the last bank set to report on Dec. 8. 

Holden sees potential for negative capital updates ahead of several changes set to take effect in the first quarter of 2024, and he seeks risks as highest at TD and Scotia due to their lack of guidance.

Holden wrote that he anticipates the whole banking sector will come under pressure in the fourth quarter as credit losses are set to peak amid weakened Canadian economic conditions. 

"Credit, of course, will be topical, with positive surprises likely to be dismissed (per U.S. banks) and negative surprises resulting in outsized share price reactions. The setup for the banks remains tough,” he added. 

Holden revised down his earnings-per-share forecast for the fourth quarter based on expected soft revenue, high expenses, slow loan growth and higher capital requirements.

BANK MARGINS ‘WILL BE TOUGH FOR WHILE’

Another investment professional said he is anticipating headwinds ahead for Canada’s biggest banks.

David Burrows, president and chief investment strategist at Barometer Capital Management, advised caution on banks, pointing to downside risks in the Canadian economy driven by a challenged real estate sector. 

“Deposit growth isn’t here in the Canadian marketplace and we think the (bank) margins will be tough for a while,” he told BNN Bloomberg in a television interview on Wednesday. 

Burrows added that his firm does not have Canadian bank exposure in their portfolios.

“We only need 20 to 30 companies to build a portfolio, we don’t need companies with major headwinds in the near term,” he said.