

Recent ramp-up in loan-loss provisions could peak this year
James Black of Beutel Goodman Investment Counsel says the Canadian financial sector is cautiously optimistic about 2025
- Featuring: James Black
- February 4, 2025 February 4, 2025
- 13:01
(Runtime: 5:00. Read the audio transcript.)
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Lower interest rates, a pro-business U.S. administration and the potential for a peak in loan-loss provisions are all causes for optimism in the financial sector, James Black says.
Speaking on the Soundbites podcast this week, the vice-president and director of equities research with Beutel Goodman Investment Counsel said banks are approaching 2025 with cautious optimism.
“Cautious as it relates to political uncertainty around tariffs and the potential for sluggish economic growth in Canada,” he said. “On the flip side, optimistic as it relates to a potential resurgence in capital markets activity.”
Black said the sector’s guarded stance is warranted given the fact that markets are volatile, capital reserve requirements are increasingly stringent, and returns on equity have been “somewhat muted” in recent years.
He also pointed out that while bank price-to-book valuations are still modest on average, banks are currently trading at higher earnings multiples than in the past.
“At the same time, if we think that we’re going to see 2025 as peak loan-loss provisions, then the outlook, I would say, is reasonably favourable,” he said.
The pandemic saw a ramp-up in loan losses but banks benefited when the impact turned out to be less than expected and they booked a lot of recoveries.
“Since that time, the credit cycle has become more negative again and the banks have been building loan-loss provisions,” he said. “The key is when do those loan losses peak, and can they peak higher than what people are expecting.”
Among Canadian banks, Black sees a risk-reward opportunity in Bank of Montreal, which completed a transformative acquisition in the United States immediately before one of the worst regional banking crises in U.S. memory.
“It is now truly a U.S. super-regional bank,” he said. “Fully 50% of its earnings come from the U.S. And there has been a re-rating in valuations in U.S. regional banks recently.”
Black also pointed out that BMO’s valuation — at about 1.3 times book value — is relatively inexpensive, and it has indicated that 2025 should see the peak of loan losses.
He also likes Toronto-Dominion Bank, despite its U.S. anti-money laundering issues which left it with an asset cap, millions of dollars in penalties and a damaged reputation. Notwithstanding the challenges, he believes the outlook for TD is favourable.
“We always go back to valuation and TD is trading at about 1.3 times book value, quite similar to Bank of Montreal. And this remains one of Canada’s leading financial services franchises,” he said. “It’s got a growing capital markets business. … And most importantly, TD’s low-cost deposit base remains the envy of the Canadian industry.”
While there’s no guarantee of success in the U.S., the market has already priced in the negatives.
“We take comfort in that, as it provides us downside protection, while at the same time giving upside if they do emerge,” he said.
The financial sector will be watching interest rate changes very closely for how they will impact homeowners and new-home buyers, Black said.
“It is always difficult to forecast bank profitability, particularly net interest margins, as there are so many factors that affect them,” he said. “What I would point out is that bank net interest margins have really been remarkably stable through time, despite all of the changes in the macro backdrop and in the absolute level of rates.”
Black said investors should examine company fundamentals closely, bearing in mind that the banks that are best positioned to absorb changes in the interest rate environment are those with the lowest cost deposit bases.
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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.