Banking: Veritas cuts bank targets, citing sour loan concerns

Veritas is cutting its price targets on the major Canadian banks due to concerns the Big Six will have to set aside more cash to cover potentially sour loans.

In a note to clients, Veritas financial services analyst Nigel D’Souza said that rising borrowing costs and a potential recession could lead to an increase in provisions for credit losses (PCLs), increasing the downside risks for shares of the big banks.

“We expect provisions for credit losses (PCLs) in [fiscal year 2024] to run materially above pre-pandemic levels barring a dovish pivot by central banks. Historically, peak credit losses lag an increase in debt servicing costs by ~two years,” he said.  

“We expect debt servicing costs to increase to a record high in 2023 and expect PCLs to accelerate and potentially peak in 2024 with inflationary pressures, rapidly rising rates, and provisions for performing loans under IFRS 9 likely pulling forward the recognition of PCLs.”