Analysts say Canadian banks may be protected by their diversified structures and the delayed impacts from higher interest rates as they report earnings amid ominous headwinds in the global economy.

John Aiken, head of Canada research at Barclays, said Monday that “the beauty” of Canadian banks is that their diverse set of financial activities sets them up well to withstand tough economic times.

“When you look at the banks and what they've cobbled together in terms of their structure, it is very well diversified, and they do have a mix of businesses where if something's not going well in the economy, that is actually promoting another part of the business,” Aiken said in a Monday interview with BNN Bloomberg.

Aiken said U.S. banks, which are not as diversified in their activities, may be more profitable under strong economic conditions, but “Canadian banks always significantly outperform on the down cycles.”

BMO and Scotiabank are due to report results on Tuesday, while earnings from RBC, TD and National Bank are expected on Wednesday. 

CIBC was the first major bank to report on Friday, when adjusted earnings per share came in at $1.94.

The bank’s provisions for credit losses rose $295 million in the quarter, below average estimates for $345 million.

Nigel D'Souza, financial services analyst at Veritas Investment Research, said estimates were likely “too pessimistic” about credit losses, something he said takes time during difficult economic periods, particularly as Canada’s labour market continues to show strong employment numbers.

He said he expects credit losses to build in Canada, but not right away.

“It’s going to take longer than I think consensus expects, because you need unemployment to move higher, and you need debt servicing costs move higher, and both of those metrics are currently near cycle lows,” he said.


Aiken said he’s not worried about the housing market’s impact on Canadian banks, which he said have “a lot of downside protection” from a potential housing market crash – though his research team is not forecasting that scenario at the moment.

“If I were running a Canadian retail bank, I would still be taking any residential mortgage I can put on the books, because when you look at how the market is structured, the banks are very protected against a crash,” he said.

D’Souza observed “limited selling pressure” in Canada’s real estate market, as many mortgage holders are still employed, and higher interest rates brought in by the Bank of Canada have not yet translated into higher mortgage payments for many people.

He said other forms of consumer debt likely pose greater threats to the banks’ bottom lines.

“Residential mortgages aren't the driver of credit losses for the banks,” he said.

“Credit cards, auto loans, unsecured lines of credit, commercial lending, that's where we think the risk is, not in the mortgage book or from real estate.”