TORONTO — Canadian bank CEOs say high interest rates are slowing spending decisions for businesses and individuals, and provisions for bad loans are likely to increase this year, but borrowers as a whole need to be better managed. said.
RBC CEO Dave McKay, speaking at the RBC Capital Markets Bank of Canada CEO Conference on Tuesday, said credit loss provisions will peak this year as parts of the commercial lending side remain nervous. He said he expected it to reach that level.
On the mortgage side, borrowers will have to adjust to payment increases of around 20% ($400 a month on average) for customers renewing their contracts this year, although higher wages and savings will help cushion the impact. McKay said.
“Our experience as an industry and as RBC in 2023 is that consumers are doing a very good job of leveraging their savings and changing their spending habits where necessary. On average, an increase in the amount increases disposable wages by 20 percent.”
McKay expects that borrowers will be able to weather the coming year as well as last year, but that 2024 will be a challenge in many aspects, particularly in U.S. commercial real estate, some multifamily markets, and capital markets. He said he expected things to worsen slightly. There is also something on the unsecured consumer finance side.
Scotiabank CEO Scott Thomson said the bank also expects to increase provisions for bad loans, but expects a more stable path this year following restructuring efforts in 2023.
“We don’t see any reserve releases, but as we review future reserves, we expect them to become more stable,” Thomson said.
Thomson said the bank’s markets in Latin America were already seeing lower interest rates, providing a tailwind for risk mitigation and loan loss reserves.
But Banco Nacional CEO Laurent Ferreira said that while there were widespread expectations that the central bank would cut interest rates this year, the market was overly optimistic about it.
He said there are a number of pressures that could complicate efforts to fully control inflation.
“There are geopolitical risks that could impact food prices and trade disruption. There is energy transition, deglobalization, government spending, all of which are inflationary,” Ferreira said.
“Yes, we should see some rate cuts, but I think the market is a little more optimistic about the Canadian economy and Canadian interest rates. We expect GDP growth to be -1.1% and 1.3% in the first two quarters. ‘, respectively. “
Bank executives said the possibility of further interest rate cuts would likely mean less lending and business activity in the short term, weighing on economic growth in the coming months.
BMO CEO Darryl White said it’s understandable for both residential and business customers to postpone borrowing for everything from home improvements to business acquisitions if they don’t need to be done today.
“If I told you about a trade you’re considering… if you do it within six to nine months from now, it’s likely to be 100 basis points cheaper. What are you going to do? I will.’ I’m going to wait,” White said.
Thomson also said many business leaders are waiting for clarity on interest rates and the economic situation more generally, which could temper expectations for increased business activity this year.
“There’s so much uncertainty in the market, and it’s clearly hindering decision-making for customers, CFOs, and CEOs.”
This report by The Canadian Press was first published Jan. 9, 2024.
Companies mentioned in this article: (TSX:RY; TSX:BNS; TSX:BMO; TSX:NA)
Ian Bikis, Canadian Press
