Outlook for Canada's Banks Dimmed by U.S. Real Estate
Rising losses from U.S. commercial real estate lending will slow the expected improvement in Canadian bank earnings over the next few quarters, Canadian bank analysts predict.
"Losses won't be catastrophic but they will continue to be a drag on earnings," said Kevin R. Choquette, a bank analyst with First Boston Canada Ltd. in Toronto.
"It's the single bigget problem for some banks," said A. Roy Palmer, an analyst with Bunting Warburg in Toronto. "It'll be around for a few more years to come."
Nearly 19% of $11.2 billion in U.S. real estate loans by Canada's big six banks were nonperforming as of July 31, according to figures compiled by Toronto-based Burns Fry Ltd. That's up 14.8% from Oct. 21, 1990, the end of the banks' fiscal year.
The Bank of Nova Scotia, the bank with the largest U.S. real estate exposure, nearly one third of some $2.8 billion in U.S. real estate loans were nonperforming on July 31.
National Bank of Canada also reported that around one-third of some $848 million in U.S. real estate loans are nonperforming, up from 27% at the beginning of the year.
Nonperforming U.S. real estate loans at other Canadian banks reached 16% of the $2.6 billion credits at the Bank of Montreal, 9.7% of the $2.5 billion in loans at Canadian Imperial Bank of Commerce, and 14.4% of the $1.4 billion in loans at Toronto Dominion Bank.
Banking analysts said they expect the increase in nonperforming loans to peak in the next few quarters.
"The U.S. commercial real estate market still looks pretty bad," said one analyst who declined to be identified. "Our view is that that's where most of the problems are going to be."
Problems with U.S. real estate loans come amid generally improved performance by Canada's big banks for the third quarter ended July 31, mainly as a result of improved interest margins.