TORONTO: Canada's big banks are preparing to set aside more rainy-day funds in the new fiscal year to deal with rising bad debts as their customers struggle with record borrowing costs and a slower economy.

The CEOs of the big six banks, who spoke at the RBC Capital Markets Canadian Bank CEO Conference on Tuesday, said the high interest rate environment casts a shadow, although they expect margins to improve.

"We still expect kind of peak PCL (provisions for credit losses) to come through in 2024, as we still will see consumers struggle with higher rates," Dave McKay, the head of Canada's biggest bank, Royal Bank of Canada, said at the conference.

McKay said the bank is looking to expand in the United States through acquisitions in the wealth or commercial space, just as it nears finalizing its $10 billion purchase of HSBC's Canadian unit.

Among the CEOs who flagged higher credit loss provisions in 2024 were TD Bank's Bharat Masrani, Bank of Nova Scotia's Scott Thomson and Bank of Montreal's Darryl White.

White said he expects to see PCLs peak at some point this year and that they would come down "a little bit" toward the end of the year as interest rates ease.

The top six banks ended fiscal 2023 on a dismal note with their profits eroded by a record rise in PCLs and rising costs.

The Bank of Canada raised its key interest rate to a 22-year high of 5% last year to fight inflation. Some C$190 billion ($141.9 billion) in mortgages are coming up for renewal this year, and the CEOs projected that mortgage borrowers' monthly payments will rise by C$300 to C$700 when they renew.

"What we're seeing is clients adjusting their own discretionary spending," Canadian Imperial Bank of Commerce's CEO, Victor Dodig, said.

The executives said net interest income - the difference between the income a bank earns from its lending activities and the interest it pays to depositors - would increase in the new fiscal year, largely due to asset repricing on the mortgage books.

"As we navigate then a rising rate environment last year to a declining rate environment this year ... we're really well positioned to capitalize on that," McKay said.

The CEOs noted that they were taking into consideration the lack of clarity on rate cuts, global uncertainties and uncertainty around regulatory outcomes.

"We're on January 8 and there's just a lot of uncertainty in the market, which obviously holds back clients, CFOs and CEOs from making decisions," Thomson said. ($1 = 1.3394 Canadian dollars) (Reporting by Nivedita Balu in Toronto Editing by Matthew Lewis)