Canadian Banks in 2024: Navigating Economic Uncertainty

Canadian banking CEOs chart the course for 2024.

By Darko Mihelic
Published February 5, 2024 | 3 min read

Key Points

  • The banks are tackling global challenges, including a changing interest rate environment, high inflation, and concerns of a potential “hard landing” economic scenario.
  • Canadian banks expect interest rates to decline in 2024, a shift from the rising rate environment seen in 2023. The banks’ expectations for net interest margins/income for 2024 ranged from stable to slight expansion.
  • The Canadian banks have strong capital ratios and could deliver more capital to shareholders in 2024 through share buybacks or dividends, in our view.

The 2024 Canadian Bank CEO Conference hosted by RBC Capital Markets earlier this month offered insights into the banking sector's response to changing global economic challenges. The event, held at the downtown Toronto Ritz-Carlton, brought together Canada's banking leaders to discuss strategies for navigating a rapidly changing financial landscape. A defining moment was captured in the kickoff interview with banking analyst Darko Mihelic and RBC President and CEO Dave McKay, with the latter stating: "The interest rate environment is one of the biggest uncertainties. But as we navigate the rising rate environment last year to a declining rate environment this year, we think we're very well positioned to capitalize on it,” said Mr. McKay. “Lower rates are going to help on the credit side, they're going to alleviate some of the consumer payment shock, free up more cash flow and help drive a quicker recovery to a softer landing.”

This outlook reflects a broader expectation for cautious optimism and adaptability for 2024 from the Canadian banks. We dissect the key insights from this conference, providing clarity on what these developments mean for both investors and consumers amid uncertain times. 

Balancing optimism with prudence

The tone at the 2024 Canadian Bank CEO Conference was a nuanced blend of optimism and caution. The banking leaders discussed several key topics: interest rate expectations, capital positions, and their management of mortgage renewal shocks, among others. Net interest margins/net interest income (NIM/NII) are important indicators of a bank’s profitability, and the banks shared neutral to mildly positive outlooks for NIM/NII for 2024. The banks emphasized better cost management relative to last year, which was a year of high expense growth. The conference also highlighted caution around loan growth and expectations for a rebound in capital markets.  

Many banks shared that they plan to reconsider the discount on their dividend reinvestment plans (DRIPs) in 2024, with some suggesting they plan to turn off the discount as early as the second quarter, which was encouraging to us on the capital front.

Interest rates: A downward trend on the horizon

A central point of discussion was the anticipated decline in interest rates expected to start around mid-2024, a shift from the rise in rates seen from March 2022 to July 2023. The banks' views on the future trajectory of interest rates varied, with some suggesting that market expectations for significant rate cuts might be slightly optimistic while others expected interest rates would stabilize at a higher level than the historic lows of the recent past.

Capital strength and its implications for shareholders

The large Canadian banks built strong capital ratios in 2023 due to increases in the domestic stability buffer set by the regulator. Most of the banks currently have discounts on their respective DRIPs, and some of the banks suggested that they plan to revisit the discount as early as the upcoming second quarter. For us, this reflected the banks' confidence in their ability to generate sufficient internal capital instead of relying on external mechanisms. Once they turn the discount off, we believe that the banks may choose to return more capital to shareholders through share buybacks or dividend payouts.

Stronger expense control in 2024

The banks suggested that they would have more stringent cost control measures in 2024 relative to 2023, which was a year of higher than usual expense growth (expenses increased ~13% in 2023 for the large Canadian banks). For the large Canadian banks excluding RY, we anticipate expense growth of ~5% in 2024. Many banks had restructuring costs in 2023, but the group shared that they do not expect to use restructuring charges on a regular basis as a way to manage costs; they emphasized using consistent expense management practices to deliver improved operational efficiency.

Mortgage renewals: Steady outlook amid changing rates

The Canadian banks had a reassuring stance on customers’ abilities to manage mortgage renewal shock. The banks cited the strength of customers' credit scores, low loan-to-value (LTV) ratios, and the existence of deposit buffers as some of the reasons why they expect mortgage renewal shocks to be manageable for many consumers. All else equal, falling rates would also ease mortgage payment shocks that many Canadians are expected to face at renewal.

This positive outlook was particularly evident in Scotiabank, which offers adjustable-rate mortgages where monthly mortgage payments fluctuate with changes in interest rates along with National Bank. Scotiabank suggested that it has not seen significant credit issues in its mortgage customers, reflecting the robustness of its consumer base which has already been absorbing higher mortgage payments due to the rising rate environment from March 2022 to July 2023.

Individual bank outlooks: A range from confidence to caution

The banks on a spectrum of “optimism” at one end and “caution” at the other end relative to our expectations are as follows: Canadian Imperial Bank of Commerce led the spectrum towards optimism, followed by Bank of Nova Scotia and Canadian Western Bank, Bank of Montreal, and Toronto-Dominion Bank. National Bank of Canada was most cautious relative to our expectations. The 2024 Canadian Bank CEO Conference provided valuable insights into the diversity in outlooks and perspectives of Canada's major financial institutions in a changing economic landscape.

Our Experts

Darko Mihelic
Darko Mihelic
Managing Director, Canadian Financial Services

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