OTTAWA: Plummeting oil prices, red hot housing markets, low interest rates, and an economy pushing into recession territory – all of these roads lead to Canada’s banking sector ahead of third-quarter results next week.
However, Andrew Pyle, a senior wealth advisor and portfolio manager at ScotiaMcleod, doesn’t expect the pain to be overly severe for the so-called “Big Six.”
“For the most part, most of the sectors look credit decent from a bank point of view. I don’t think we’re going to see a tremendous amount of downside on the banks,” he said in an interview.
Pyle says energy presents the biggest risk to Canada’s largest lenders. Exposure to corporate oil and gas assets and Alberta mortgages could spell trouble in a worst case scenario defined by low oil prices and weak economic growth.
He also notes that volatility in capital markets often negatively impacts the bottom line in the financial sector. The TSX fell more than 225 points by midday Thursday as declines in financials and energy stocks weighed on the index. Royal Bank (RY.TO 2.33%) and TD Bank (TD.TO 2.71%) were among the worst performers.
“Bank stocks don’t do that well when we have extremely volatile capital markets. I would say we’ve probably been through some volatile times in the last three months. That probably will show up in the earnings,” said Pyle.
Canada’s mortgage market has remained relatively safe despite ongoing concern over skyrocketing prices in Toronto and Vancouver as well as weakness in Canada’s energy centres, with most banks moving to insure loans that aren’t backed by the Canada Mortgage and Housing Corporations. However, net interest margins could be hurt if demand for loans falters.
“The jury is still out on whether this country is in recession, embarking on a recession, or climbing out of a recession. That’s where we look for the impact on loan demand, the bread and butter of what that banks do every day,” said Pyle.
