Thread by @ASclipoti

As we head into 2023, we at Veritas think the headwinds are getting stronger against the Canadian #banks. Let's look at a few data points in the next series of tweets.

1/15

First, when the Big Six reported their Q4 results early in December, none except $RY saw a #recession coming in the next 12 months in their base case forward looking economic indicators. (RY estimated real GDP growth of negative 0.2%).

2/15

However, notice how much more negative their indicators got between Q3 and Q4 (red means the bank is more negative relative to the other banks and green more positive).

3/15

Given the recent economic data, we expect the banks to get more negative again when they report Q1-F23 results, which means higher loan loss provisions.

4/15

Next, we had OSFI raising the Domestic Stability Buffer earlier this month, citing "systemic vulnerabilities due to elevated household leverage." That forced $BMO to issue a surprise $3.2B share offering to shore up its capital ahead of its Bank of the West acquisition.

5/15

CIBC also quietly started to offer a 2% discount on its dividend reinvestment program as a way to do the same. We all know that banks only raise capital when they absolutely must. $CM

6/15

Next, consider that in times of rising #interestrates, banks are supposed to make more money, but it seems that hasn't worked out the way it was supposed to.

7/15

The table below shows the sensitivity disclosure to each bank's Net Interest Income if rates rise 100 bps or fall 100 bps. As you can see, only $TD and $RY have been able to take full advantage of rising rates.

8/15

The effect has been muted at the others because of business mix and hedging. Interestingly, $BNS' hedges held it back as rates rose, which should mean the bank stands to gain as rates decline.

9/15

Next, keep an eye on the Household Debt Service Ratio. Know that it is a backward-looking indicator. It's been ticking up slowly the past two quarters, but it takes time for debt and mortgages to roll over to new higher rates (chart below is for trailing 12 months).

10/15

We expect the ratio will hit record levels next year and that will put pressure on households. We think OFSI has good reason to be concerned.

11/15

Here is another way to consider the state of the Canadian #consumer.

First, we compare US Household Debt to GDP versus the YoY Rate of Change of the Effective Fed Funds Rate going back to 1955.

12/15

And in this graph, we compare Canadian Household Debt to GDP versus the YoY Rate of Change for the Bank of Canada policy rate.

13/15

Rates have risen more violently in the US but Canadian consumers are getting squeezed harder because of their relatively higher indebtedness.

The pressure is going to mount next yr on consumer discretionary spending, the housing sector and, therefore, on bank loan losses.

14/15

Banks are complex organizations. Paying attention to details and understanding why things are happening is critical.

15/15