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Deteriorating Outlook for the Big Six Banks
Our Financial Services Analyst Nigel D'Souza was a guest on BNN Bloomberg, providing his outlook for the Canadian banks as they started reporting their Q4-F22 results this week.
He expects the banks to start reporting higher provisions for credit losses on performing loans this quarter, as the macroeconomic outlook has deteriorated since the banks reported Q3 results. "When you look at the assumptions banks use to model credit losses, last quarter's assumptions are a bit optimistic relative to current consensus economic forecasts," he said, also explaining that the provisions taken won't be uniform across all the banks because some of them already have excess reserves.
"What is baked into consensus is an expectation for a mild recession in Canada with credit losses running at about the same level as pre-pandemic," he said. However, we have more household leverage today than we did in 2019 and the Bank of Canada policy rate is already at 3.75% versus a high of 1.75% in 2018.
Nigel's lone BUY amongst the Big Six banks is on Bank of Nova Scotia (TSX: BNS), which reported today.
"Scotiabank's share price has underperformed substantially over the past two years. It is trading at a very discounted valuation," he said. "Weak fundamentals are more than reflected in the share price. Yes, there is some uncertainty with the leadership change recently, but we think you're getting a positive risk versus return for Scotiabank that you aren't quite getting with other banks that are only pricing in a mild recession."
Watch the replay: We believe there will be a deterioration in the macro outlook for the Big Six banks: Nigel D’Souza
Or read the article summarizing the interview: Canadian banks may downgrade economic forecast, but not confirm recession: analyst
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