OTTAWA — Canada’s banks are expected to report higher profits when they start releasing first quarter results this week but investors hoping for a boost in dividends will likely have to wait at least until later this year, analysts say.
Slow and steady improvement in core retail banking operations is expected to drive growth as profits from investment banking businesses weaken due to lower trading revenue, offset somewhat by merger and acquisition work and underwriting.
“Despite providing ongoing evidence that the recovery is progressing, this quarter’s results should continue to point to a sluggish lending environment and a more challenging capital markets business,” CIBC analyst Robert Sedran wrote in a note to clients.
“We expect fixed expenses and loan losses to come back in line after jumping higher in the fourth quarter. Those positives should largely balance out the impact of a decline in trading results and flattish lending net interest income.”
However, while there is general agreement about where the strengths and weaknesses are for the sector, analysts disagree on where the bank stocks are headed.
Shares of Canada’s big banks and insurance companies have been on a tear since the beginning of the year. The S&P/TSX Financials index is up seven per cent since the beginning of the year and about 12 per cent from a year ago.
Sedran rated the sector “market weight” and suggested the banks were trading at roughly their historical averages, which have been relatively stable.
“Further near-term share price gains for the group as a whole will require upward earnings revisions,” Sedran wrote in a report to clients.
However Scotia Capital analyst Kevin Choquette called the bank fundamentals strong and rated the sector “overweight.”
“Bank dividend yields are attractive relative to bonds, equities... and utilities and real estate investment trusts,” Choquette wrote.
CIBC (TSX:CM) and National Bank (TSX:NA) will be the first of Canada’s big six banks to report earnings when they release their results Thursday.
The average analyst estimate for CIBC is for a profit of $1.77 per share, while the average estimate for National Bank is for $1.64 per share, according to Thomson Reuters.
RBC Capital Markets analyst Andre-Philippe Hardy suggested provisions for bad loans at CIBC will be down from a year ago, but up from the fourth quarter of last year.
“We also believe that the tough conditions in the U.S. commercial real estate market could lead to continued provisions in its U.S. real estate finance portfolio,” Hardy wrote in a note to clients.
Bank of Montreal (TSX:BMO), Royal Bank (TSX:RY) and TD Bank (TSX:TD) are expected to report next week.
The average analyst estimate for BMO is for a profit of $1.30 per share, while Royal Bank is expected to earn $1.01. The average estimate for TD is for $1.54 per share.
If any of the big Canadian banks are going to raise their dividend this quarter, Several analysts suggested TD would be the most likely.
“We believe the bank has the capacity to hike its dividend and we expect that it will be the first of the Big Five banks to do so,” Sedran wrote in a note.
Scotiabank (TSX:BNS) will be the last on March 8. It is expected to report a profit of $1.06 per share, according to the average analyst estimate.