With economic growth expected to pick up, and more interest rate cuts ahead, the outlook for the Big Six banks is a rosy one — but the risks to the outlook are heavily skewed to the downside, Morningstar DBRS cautions.
In a new report, the rating agency said the economic outlook for North America is “generally positive,” which should underpin improved earnings for the Big Six banks in fiscal 2025.
“We expect modest GDP growth in Canada at 1.1% in 2024, picking up to 1.8% in 2025 and 1.9% in 2026,” it said.
And, as inflationary pressures ease in Canada, allowing for looser monetary policy, this is expected to reduce the financial strain on heavily indebted households and to improve credit conditions.
In turn, the banks’ earnings should benefit from moderating credit loss provisions in fiscal 2025, DBRS said.
“The lower interest rate environment heading into [fiscal 2025] will provide some relief with respect to debt servicing costs, easing some concerns related to real estate secured lending and mortgage risks and wholesale credit risks,” it said.
The credit rating agency added it also expects the banks to generate gradual revenue growth in the year ahead.
“We expect growth in capital markets underwriting and advisory activity, although fee revenue growth from trading and wealth management may be more muted after strong results in [fiscal] 2024,” it noted.
However, heightened policy uncertainty and geopolitical headwinds could put the positive economic picture and outlook for improved bank earnings at risk, it cautioned.
In particular, potential shifts in U.S. trade policy, and the risks posed by regional conflicts present possible threats to the otherwise improved outlook, the report noted.