The Canadian banking sector is veering ever closer to major loan losses, a new CIBC Capital Markets report warned.
Amid worsening credit conditions, such losses – which the CIBC described as “hardly apocalyptic, but still noteworthy” – are looming just beyond the horizon.
“Given the age of the current cycle and soft Q1/F19 reporting in which most banks saw notably weaker loan loss provisions, it does feel like the minute hand on our Credit Doomsday Clock moved a little closer to midnight, not to signal that the end of humanity approaches, but that the end of trough loan losses is coming,” CIBC Capital Markets analysts Robert Sedran, Christopher Bailey, and Marco Giurleo wrote in a client note last week, as quoted by BNN Bloomberg.
Moreover, Canadian banks also seem to be headed towards their weakest credit cycle since the oil-price-crash-induced loan losses in 2016.
“While Canada has not seen a meaningful economic downturn in quite some time, [Canadian banks] remain cyclical businesses that are built to absorb the pain when it comes, not avoid it.”
The warning followed a Veritas Investment Research analysis last month, which urged clients to “lighten up” on stock associated with the country’s largest banks as their loan loss provisions will likely go up.
Steve Eisman, who had predicted the previous decade’s U.S. housing market crisis, cautioned that Canada’s bank CEOs are “ill-prepared” for any potential credit losses stemming from an economic downturn.
Among Eisman’s list of most at-risk lenders are Royal Bank of Canada, Canadian Imperial Bank of Commerce, and Laurentian Bank of Canada, along with insurer Genworth MI Canada Inc. and alternative lender Home Capital Group Inc.