As Canadian banks head into the fourth quarter of 2024, there is a renewed sense of optimism among investors. Fears of mortgage defaults and an impending recession have diminished, contributing to a positive outlook for the financial sector. The S&P TSX bank index has risen by 12% since the last quarter, with notable gains from Scotiabank and CIBC, which saw increases of 19% and 17%, respectively. However, TD Bank faces challenges due to a significant US$3 billion fine that has impacted its stock performance. Analysts emphasize the importance of earnings growth to justify the banks' high valuations, currently at 12.1 times earnings. Meny Grauman from Scotiabank highlighted that the momentum is largely driven by soft landing scenarios for both the U.S. and Canadian economies.
In the context of broader economic conditions, Fitch Ratings reported on November 22, 2024, that Canadian credit card performance remained stable in the third quarter, with delinquencies and charge-off rates largely unchanged. The three-month average for late-stage delinquencies was 1.12%, consistent with Q2 2024 and slightly below pre-pandemic levels. The net charge-off index was recorded at 2.91%, a slight decrease from 2.93% in Q2 2024 but an increase from 2.47% in Q3 2023. The Monthly Payment Rate Index averaged 57.76%, reflecting a decline attributed to more cardholders revolving balances. Fitch anticipates stable credit card performance for the remainder of 2024, driven by easing inflation and declining interest rates.
The Bank of Canada has cut rates by 1.25 percentage points since June, bringing the rate down to 3.75%, which has eased the burden of mortgage payments for many Canadians. Despite these positive indicators, banks have set aside $4.4 billion for potential loan losses, which are expected to peak in early 2025. Mortgage delinquencies remain below pre-pandemic levels, providing further reassurance to investors. Upcoming earnings reports from major banks, including Scotiabank, National Bank, RBC, BMO, TD, and CIBC, will be closely watched as they reflect the health of the financial sector moving forward. Overall, the third quarter of 2024 has seen a mix of challenges and opportunities for Canadian banks, with a cautious yet optimistic outlook for the future.