By Nivedita Balu

TORONTO Canada's big banks are likely to wrap up a challenging financial year with another quarter of declining profits and rising bad debt provisions amid a slowing economy.

The big six banks have axed thousands of jobs this year as investment banking fees lagged and business south of the border weakened due to the U.S. regional banking crisis.

While high interest rates have boosted the banks' lending margins, residential mortgages, auto loans and commercial real estate loans have slowed as consumers and businesses pulled back.

The fallout from high borrowing costs on commercial real estate lending and auto loans as well as the renewal of nearly C$900 billion of residential mortgages starting next year will weigh on banks.

"Investor focus would be on potential for expanding net interest margins to offset slowing loan growth and rising credit costs," BofA analyst Ebrahim Poonawala said.

Provision for credit losses (PCLs), the money banks set aside to cover bad loans, is expected to grow at least 39% at National Bank and more than double at Bank of Montreal, which acquired U.S lender Bank of the West earlier this year.

Profits at the big six banks are expected to shrink an average 3% from a year ago as PCLs climb and revenue growth slows, KBW analyst Mike Rizvanovic projected. He lowered his forecast for fiscal year 2024 earnings.

"We continue to see a challenging environment for the group heading into fiscal 2024," Rizvanovic said, noting that higher PCLs, a prolonged mortgage renewal cycle and the impact of high interest rates on consumer lending would curtail balance sheet growth.

Banking stocks have lost between 1% and 10% so far this year, compared with a 3.7% rise in the benchmark Canada share index.

MORE AREAS OF WORRY

Refinancing of home loans is expected to bring a lot of pain to customers who took out cheaper mortgages during the pandemic. With interest rates forecast to remain high, renewal of the mortgages will squeeze household budgets.

Banks are also rethinking lending to industries sensitive to high interest rates, from condo development to office space.

"We want to make sure we have some kind of confidence when a project is going to go ahead," said Victoria Girardo, Canadian Western Bank's VP in real estate lending.

In Toronto alone, developers have delayed launching nearly 14,000 condo units so far this year, according to Urbanation data, highlighting rising borrowing costs and economic uncertainty.

Veritas Investment Research analyst Nigel D'Souza noted that real estate developers are facing liquidity pressures as many consumers are not able to close purchases that have been presold due in part to higher mortgage rates.

"That is creating liquidity issues across the real estate developer space. And you're seeing either some developers facing bankruptcy or facing financing shortfalls. Those pressures will continue to build," he said.

Reporting Net interest PCL Adjusted

date income EPS

RBC Nov. 30 -2.2% 81% C$2.62

TD Nov. 30 0.8% 40.8% C$1.90

BMO Dec. 1 32.7% 125% C$2.85

Scotiabank Nov. 28 0.15% 57.3% C$1.65

CIBC Nov. 30 5.6% 43.2% C$1.53

National Dec. 1 -2.4% 38.6% C$2.26

Bank

*Estimates from LSEG data

(Reporting by Nivedita Balu in Toronto; Editing by Mark Porter)