Canadian Big Six Banks 2024 Outlook: Higher PCLs and a Weakening Economy Signal a Tough Operating Environment

The banking outlook is affected by a weakening economy, amid an uncertain macroeconomic outlook, along with an interest rate environment that has materially increased debt servicing costs. Looking forward, we expect the challenging operating environment to pressure earnings in F2024, with higher provisions for credit losses (PCL) as credit quality deterioration progresses. Nonetheless, the Big Six remain well positioned with ample liquidity and a resilient deposit base, sound capital levels, and sufficient internal capital generation.

Key highlights include the following:

-- Macroeconomic conditions are intensifying vulnerabilities and key financial system risks; however, the Big Six are well positioned to weather a more adverse operating environment, and DBRS Morningstar’s F2024 credit rating outlook for the Big Six is Stable.

-- While net income in F2024 will be pressured by some revenue headwinds and higher PCL, a focus on expense control should act as a partial mitigant.

-- DBRS Morningstar expects the Big Six to continue fortifying capital levels in F2024, with the ability to take additional actions to boost capital if needed to align with higher regulatory requirements on the horizon.

“DBRS Morningstar expects credit normalization to continue in F2024, with higher delinquencies, PCLs, and loan losses. With the Bank of Canada hiking interest rates 10 times since March 2022 (totalling 475 bps) in its effort to combat inflation, borrowing costs have materially increased. Interest sensitive households and businesses will face increasing pressure as loans continue to reprice at materially higher interest rates,” said Carl De Souza, Senior Vice President, North American FIG. “That said, the Big Six have been disproportionately increasing PCLs in areas of concern such as the CRE office sector.”