Bank CEOs expect further loan loss provisions and pressure on lending in 2024

TORONTO - Canadian bank CEOs say high interest rates are delaying business andconsumer spending decisions and will likely lead to more provisions for bad loans this year, but that borrowers overall should manage well.

RBC chief executive Dave McKay, speaking at the RBC Capital Markets Canadian Bank CEO Conference on Tuesday, said he expects to see credit loss provisions peak this year as parts of the commercial lending side remain strained.

Borrowers on the mortgage side are having to adapt to payment increases of roughly 20 per cent, or $400 per month on average, for its clients renewing this year, but higher wages along with savings are helping to soften the impact, said McKay.

“Our experience in 2023 as an industry, and at RBC, is consumers are doing a very good job of using their savings, of changing their spending habits if necessary. But also don't forget that the 20 per cent payment increase matches, on average, a 20 per cent disposable payroll increase.”

McKay said that while he expects borrowers to weather the year ahead much like they did last year, he expects 2024 to be a little worse on a number of fronts, especially commercial real estate in the U.S., some multi-family residential markets, capital markets and some on the unsecured consumer lending side.

Scotiabank chief executive Scott Thomson said the bank also expects higher provisions for bad loans, but sees a more steady path this year after 2023's restructuring efforts.

“I don't see any provision release, I do see more of a steady hand as we look at provisions going forward,” said Thomson.

Thomson says the bank's markets in Latin America are already seeing rates fall to help reduce risk and provide a tailwind on loan loss provisions.

But while there are widespread expectations that central banks will lower rates this year, markets are being overly optimistic about it, said National Bank chief executive Laurent Ferreira.

He said there are numerous pressures that could make the push to get inflation fully under control harder.

“You have geopolitical risk, which could impact food price, trade disruption. You have energy transition, deglobalization, you have government spending, these are all inflationary,” said Ferreira.

“Yes, we should see some rate cuts, but I think the market is a little bit optimistic in terms of the Canadian economy and rates in Canada. We're expecting negative GDP growth for the first two quarters, minus 1.1 and 1.3 per cent, respectively.”

The potential for rate cuts ahead will likely mean less lending and business activity in the near-term, said several bank executives, pressuring economic growth over the next few months.

BMO chief executive Darryl White said it makes sense that both personal and business clients are putting off borrowing on everything from home renovations to buying a company if they don't need to do it today.

“If I told you that in a transaction that you were considering ... the high likelihood is if you do it in six or nine months from now it's going to be 100 basis points cheaper, what are you going to do? You're going to wait,” White said.

Thomson also said many business leaders are waiting for clarity on rates, and the economic picture more generally, leaving him to temper expectations around increased business activity this year.

“There's just a lot of uncertainty in the market, which obviously holds back clients, CFOs and CEOs, from making decisions.”

This report by The Canadian Press was first published Jan. 9, 2024.