Large Canadian Banks Q1 2023 Earnings Round-Up: Resilient Performance Boosted by Trading Revenues

Results in Q1 2023 remained resilient for the Big Six Canadian banks despite macroeconomic headwinds. Trading revenues provided a boost to sequential earnings, partially offset by higher provisions for credit losses (PCL) and noninterest expenses (i.e., higher personnel-related costs and technology spend for digital investments and to support growth). As a result, aggregate quarterly adjusted earnings increased 7% quarter over quarter (QOQ) but declined by 2% year over year (YOY) as a result of materially higher PCLs. While PCLs continued to increase in Q1 2023, including a QOQ increase in PCL on impaired loans, the ramp-up in total PCLs QOQ was lower than expected. Meanwhile, net interest margin (NIM) expansion moderated QOQ with an aggregate average increase of 3 basis points as loan growth slowed and higher funding costs compressed margins.
Key highlights include:

-- Despite macroeconomic uncertainty and headwinds, the Big Six posted resilient results for Q1 2023, boosted by trading revenues.

-- Credit quality continued to normalize in Q1 2023 from unsustainably low levels. A prolonged economic slowdown or recession, combined with materially higher borrowing costs for creditors, has the potential to amplify credit deterioration beyond normalized levels.

-- The expected moderation in NIM expansion and lending volumes during the remainder of F2023, along with higher PCL, will likely dampen earnings growth. The Big Six, however, remain well positioned with ample liquidity and adequate capital levels.

“Capital levels at the Big Six remain sound and provide sufficient cushion to absorb potential losses. The aggregate CET1 ratio remained flat QOQ at 13.7%. The Big Six all continue to maintain an adequate capital buffer above the increased CET1 regulatory minimum of 11.0%, which took effect on February 1, 2023,” said Carl De Souza, Senior Vice President, North American FIG. “Several large acquisitions targeted to close in 2023 may result in additional actions to boost capital, such as BMO's $3.35 billion equity raise in December 2022. DBRS Morningstar expects the Big Six to manage CET1 ratios closer to 12.0%.”