Canada’s biggest banks reported a mixed bag of fourth quarter results last week, and experts are pessimistic about their earnings growth potential in 2024 amid the high interest rate environment.

TD Bank, Scotiabank and Bank of Montreal missed earnings estimates, while National Bank of Canada, CIBC and Royal Bank all beat. 

All six banks raised dividends despite the mixed results, but Baskin Wealth Management’s chief investment officer told BNN Bloomberg that shareholders shouldn’t expect high returns next year.

“The outlook is terrible for the Canadian banks heading into 2024 unless mortgage rates and interest rates are cut,” Barry Schwartz said in a Monday television interview.

“The problem is, there’s no earnings growth and the outlook for 2024 is most of the Canadian banks are going to report earnings declines.”

MORTGAGE INTEREST

Mario Mendonca, managing director and senior financial services analyst with TD Securities, also expects subdued earnings growth for Canada’s major banks next year.

He told BNN Bloomberg on Monday that rising mortgage interest for Canadian households will “crowd out” other payments, leading to increased credit losses for banks.

“What we are seeing from these higher mortgage payments … is delinquencies and gross impaired loans rising in other loan categories,” he said.

“That's what's going to cause credit losses to rise in 2024, and lead to weaker earnings growth.”

BANKS ADJUSTING TO HIGH RATES

Mendonca said that while he believes bank earnings growth will be “soft” in 2024, he doesn’t think it will be because of higher credit losses in the mortgage market.

“I don't believe the Canadian mortgage market is going to be the cause of significant stress for our Canadian banks,” he said.

Banks have had time to adjust to higher interest rates, Mendonca explained, and have done well to mitigate related credit risks.

“While I believe there's some credit risk here, there is certainly normalization that's playing out in 2024,” he said.

“I don't fall into that Armageddon camp, where the Canadian mortgage market will necessarily cause materially higher credit losses for Canadian banks.”

INVESTMENT OUTLOOK

Schwartz said he expects earnings to reaccelerate closer to 2025, if and when the Bank of Canada brings interest rates down.

Canada’s central bank has hiked interest rates to five per cent from a low near zero in March 2022. Its next rate decision is expected on Dec. 6, with most economists calling for a third consecutive hold at five per cent.

“I just don’t see how (earnings growth) is going to happen unless interest rates come down,” Schwartz said.

He added that for long-term investors in bank stocks, the best strategy is to “stick with it” and always back the best performing banks.

“My favourites right now are Royal Bank and National Bank,” Schwartz said.

“They don’t have the type of exposure of some of the other Canadian banks, but good exposure to capital markets, which I’m always bullish on.”