Canadian bank stocks had their worst start to the year in a quarter century as a plunge in crude oil and overstretched consumers dim their profit outlook.
The eight-company Standard & Poor’s/TSX Commercial Banks index has dropped 9.9 percent this month, the weakest start to a year since the 12 percent decline in January 1990, according to data compiled by Bloomberg.
“The negative, uncertain outlook for Canada’s economy will continue to weigh on the Canadian banks, challenging the group’s earnings over the near term,” John Aiken, an analyst at Barclays Plc, said in a note to clients Friday as he downgraded four of the country’s banks.
Aiken cut Bank of Montreal, Royal Bank of Canada, Toronto-Dominion Bank and Laurentian Bank of Canada to the equivalent of a sell from a hold. The Toronto-based analyst expects profit among the six-biggest banks to rise 3.1 percent this year, the slowest since 2009.
A 56 percent plunge in the price of crude oil over the past seven months, which has knocked economic growth and jobs, further clouds the outlook for Canadian banks already dealing with weaker consumer lending. A surprise cut in the Bank of Canada’s overnight lending rate last week is a “net negative” for the banks, Aiken said.
“The action from the central bank implies lower economic growth than is currently reflected in the market,” Aiken said. “We do not anticipate a significant uptick in consumer loan demand and believe that incremental margin compression is likely.”
The Bank of Canada reduced its trend-setting overnight lending rate 25 basis points to 0.75 percent on Jan. 21, saying the drop in oil prices would reduce growth and inflation. Six days later, Canada’s six-biggest lenders cut their prime lending rates by 15 basis points to 2.85 percent, failing to fully match the central bank’s rate reduction.
Domestic lending has slowed at the nation’s banks as indebted Canadians pare borrowing on loans and mortgages. The pace of year-over-year mortgage growth last year was about half what it was eight years ago, according to Bank of Canada data.
Bank of Montreal fell 4.2 percent to close Friday at C$73 in Toronto, while Royal Bank dropped 3.1 percent to C$71.79 and Toronto-Dominion slid 2 percent to C$50.60.
Canadian Imperial Bank of Commerce is cutting about 500 jobs across the country, or about 1 percent of its staff, saying Thursday the reductions are needed to ensure the Toronto-based bank is operating efficiently.
“From a defense of the bottom line standpoint, it’s a prudent move if CIBC is truly anticipating its revenue growth will be lower than originally anticipated,” Aiken said Thursday in an interview.
It was “surprising” for a bank to disclose job cuts in the first quarter as opposed to the “kitchen sink” fourth quarter, when they sometimes include charges to start the following fiscal year fresh, Aiken said.
CIBC’s cuts come almost three months after Bank of Nova Scotia said it was reducing 1,500 jobs, the most of any Canadian lender in a decade, with two-thirds of the reductions in Canada.