Canada's Big Five banks all sounded notes of caution in releasing results this week as pressure builds on the economy, though each pointed to somewhat different strategies in preparing for a potential recession.
TD Bank was the only one not to raise its dividend in what it said was a move to preserve capital, CIBC was alone in increasing its provisions for credit losses (though BMO warned that it will likely do so soon), while Scotiabank and RBC said they were taking various approaches to tighten their risk analysis scenarios in light of the worsening outlook.
Risk officers took centre stage on earnings calls as words like "uncertainty" and "fluid" came up repeatedly, as all warned of the potential for the economy to go into retreat on the combined pressures of supply chain problems, Russia's invasion of Ukraine, a tight job market, and central banks trying to rein in the rampant inflation that all those factors are causing.
"There's certainly more uncertainty," said BMO chief risk officer David Casper.
RBC chief executive Dave McKay said that while he believes the economy is more mid-cycle, the need for central banks to hit demand "really hard" to reduce inflation is creating increasing unpredictability on how it will play out.
"From that perspective, markets are struggling to predict how we land the economy, do we land it with a slight recession? And our message today is, it could go either way, it's 50-50."
The economic picture has shifted markedly from last quarter as energy prices have spiked since Russia's invasion of Ukraine, while China's pandemic lockdown measures have worsened supply chain issues.
"Since February, things have changed," said TD Bank chief executiveBharat Masrani.
"The war is a reality in Europe. You see energy prices are all over the place. So there is a lot of volatility here. And as is usual from TD, to address volatility and uncertainty of this type, we want to be prudent," he said in explaining the bank's move not to raise its dividend.
But as McKay noted, there are also still many healthy indicators, at least looking back over the three months to the end of April.
All the banks reported loan growth either nearing or into double digits from a year earlier, while credit card spending has jumped as COVID-19 restrictions fade away.
And while mortgage-fuelled loan growth has raised concerns about over-leveraged households, the banks emphasized the improved credit profile of its clients during the pandemic and the strong job market that is helping to support spending.
All banks but TD increased their dividends in a sign of financial confidence.
The banks themselves are also poised to benefit from rising interest rates, with RBC noting it has already seen a $75 million bump from the recent Bank of Canada rate hikes, while TD Bank said that every 50 basis point increase brings it US$350 million a year after-tax.
But the banks are no doubt preparing for a potential change in the economic picture as they plug in tougher scenarios to their risk analysis.
"Given the macroeconomic environment, we run stress tests that would have more harsh inputs today than we would have possibly a year ago," said Scotiabank chief executive Brian Porter on an earnings call Wednesday.
The mortgage market is already slowing on the higher rates, while banks are seeing expenses rise on salary and other pressures, leading some to strike especially strong notes of caution.
TD chief risk officer Ajai Bambawale said the bank is expecting a correction in the housing market, and may have to build up more loan loss allowances if the overall economy worsens.
"The situation is quite fluid right now. And what the future holds, who knows. But to the extent we are in a recessionary scenario, or even in a stagflation kind of scenario, it is possible we may have to build results. I think, at this point, because we are seeing all this uncertainty, we're just being very prudent, very careful, thoughtful and deliberate."