The S&P/TSX Composite Commercial Banks Index, which tracks Canada’s eight largest lenders, fell 3.8% on Thursday, its biggest drop since June 2020, after JPMorgan Chase & Co. reported results. and Morgan Stanley indicating a worsening outlook for the world’s largest economy. Royal Bank of Canada, the country’s biggest lender, sank 5.6%, the most since March 2020, when the pandemic ravaged markets. It has fallen 20 percent from its record high in January. Bank of Nova Scotia and Toronto-Dominion Bank were down as much as 3% and 2.1% respectively. Canadian lenders are expected to report earnings next month. “The negative effect in Canada was much more significant than I would have expected,” AGF Investments vice president and portfolio manager Mike Archibald said in an interview. “Canadian banks have fallen as much or more than US banks, more so depending on which one you look at. There is a lot of uncertainty about what the economic environment could look like over the next six to 12 months.” The two US banks reported worse-than-expected second-quarter earnings, with JPMorgan suspending stock purchases to shore up its capital stockpile. It also added US$428 million for potential foreign loans, reflecting “a modest deterioration in the economic outlook.” Meanwhile, Morgan Stanley’s investment banking revenue fell 55%, more than the 47% analysts had forecast, as capital markets activity slowed. With four major U.S. banks reporting earnings in the coming days, investors will assess the extent to which lenders are preparing for the recession and potential recession — and what that could mean for Canadian banks when they report at the end of August. Canadian banks started the year as one of the strongest performing sectors in the S&P/TSX composite index, leading the market to a record high in March. Since then, recession fears have grown as central banks tighten monetary policy to combat accelerating inflation. That weighed on banks and the broader market, dragging Canada’s benchmark stock index down 17% since March 29. The Bank of Canada raised interest rates by a full percentage point on Wednesday, a surprise move to withdraw stimulus before four-decade high inflation takes hold. A report on Thursday showed manufacturing sales in Canada fell for the first time in eight months.
