Recession Fears Boost US Bank Shares Lenders Batter Canada

Recession Fears Boost US Bank Shares Lenders Batter Canada

Royal Bank of Canada, the nation’s largest lender, sank 5.6%, the most since March 2020 when the pandemic devastated markets. It has plunged 20% since its record high in January. Bank of Nova Scotia and Toronto-Dominion Bank slumped as much as 3% and 2.1% respectively. Canadian lenders are due to report earnings next month.

The two US banks reported worse-than-expected second-quarter earnings, with JPMorgan suspending share buybacks to bolster its capital buffer. It also added $428 million for potential sour loans, reflecting “a modest deterioration in the economic outlook.” Meanwhile, Morgan Stanley investment banking revenue plunged 55%, more than the 47% that analysts predicted, as capital markets activity slowed.

Canadian banks started the year as one of the strongest performing sectors on the S&P/TSX Composite Index, driving the market to a record high in March. Since then, fears of a recession have grown as central banks tighten monetary policy to combat accelerating inflation. That’s weighed on banks and the broader market, dragging down Canada’s equity benchmark 17% since March 29.

With four major US banks set to report earnings in the next few days, investors will be assessing the degree to which lenders are bracing for the downturn and potential recession — and what that could mean for Canadian banks when they report at the end of August.

Story Highlights

  • The S&P/TSX Composite Commercial Banks Index, which tracks Canada’s eight largest lenders, dropped 3.8% Thursday, the biggest drop since June 2020, after JPMorgan Chase & Co. and Morgan Stanley posted results that pointed to deteriorating prospects for the world’s largest economy.

  • “The knock-on effect to Canada has been much more significant than I would have expected,” AGF Investments vice-president and portfolio manager Mike Archibald said in an interview. “Canadian banks are down as much or more than the US banks, more depending on which one you’re looking at. There’s a lot of uncertainty around what the economic environment could look like over the next six to 12 months.”

The Bank of Canada hiked interest rates by a full percentage point on Wednesday, a surprise move to withdraw stimulus before four-decade-high inflation becomes entrenched. A report Thursday showed Canada’s manufacturing sales fell for the first time in eight months.