Canadian banks to report ‘solid’ quarter amid trade tensions, strong employment

TORONTO — Trade uncertainty may weigh on the Canadian banks’ upcoming financial results, but strong employment numbers on both sides of the border and a continued boost from their international footprints will likely result in a ”solid” quarter, analysts say.

“Given trade policy discussion and other geopolitical tensions, revenue may be a little softer or may be weakening… (But) the banks have a good handle on managing expense growth,” Robert Colangelo, the senior vice-president of financial institutions at ratings agency DBRS, said in an interview.

“So, net-net, I think overall we will see another solid quarter.”

Several analysts estimate the country’s six biggest banks will see modest earnings-per-share growth in the quarter ended July 31 in the range of six to seven per cent year-over-year amid tariff talk, U.S.-China tensions and other headwinds.

But all ears will be on commentary from bank executives on their outlooks for the remainder of the year, with the U.S. Federal Reserve’s cut to interest rates last month for the first time since the global financial crisis expected to eat into their profit margins.

The Royal Bank of Canada is the first of the country’s biggest lenders to report its results for the quarter ended July 31 on Wednesday, followed by the Canadian Imperial Bank of Commerce on Thursday. The Bank of Montreal and Bank of Nova Scotia both report their latest earnings on Aug. 27, followed by National Bank of Canada on Aug. 28 and Toronto-Dominion Bank on Aug. 29.

During the previous quarter, the top six banks delivered a mix of hits and misses, but still grew net income collectively by roughly seven per cent from the previous year, helped by their international businesses.

The contribution from outside Canada’s borders is expected to be a positive factor this quarter as well.

U.S. and international personal and commercial banking earnings growth is forecast to increase by 16 per cent increase year-over-year, on average, Darko Mihelic, an analyst with RBC Capital Markets, said in a note to clients.

That will help to offset slower domestic personal and commercial banking growth, which Mihelic forecasts at 3.8 per cent across the sector in the third quarter, year-over-year.

Another element will be expenses, which have been an important headwind, said Gabriel Dechaine, an analyst with National Bank of Canada Financial Markets.

The average Big Six bank has reported six per cent expense growth during the first half of this financial year, while the top-line revenues increased just five per cent, he said in a note to clients.

“Unsurprisingly, four of the banks have guided to lower second-half expense growth as a primary means to improve bottom line performance (and to achieve positive operating leverage),” Dechaine said.

All eyes will be on credit quality again this quarter as well.

Earlier this year, a Veritas analyst urged investors to reduce their exposure to the Canadian banks ahead of an “acceleration of credit losses.” As well, Steve Eisman, the U.S. portfolio manager featured in “The Big Short”, also reiterated his bet against the country’s biggest lenders, pointing towards the real estate sector and noting that Canada hasn’t had a credit cycle in roughly three decades.

However, while domestic mortgage growth in the wake of tighter mortgage lending rules introduced at the beginning of 2018 has slowed, it remains in the mid-single digit range and employment is robust, Colangelo said.

“Labour conditions still remain very strong in both Canada and the U.S. And so that has played a large part in terms of economic activities and supporting… the credit quality at the banks,” he said.

But provisions for credit losses, or money set aside for bad loans, jumped by 28 per cent across the sector during the first half of the financial year, said Dechaine, a pattern he attributed to the banks taking a more cautious economic outlook.

With the Canadian unemployment rate reaching multi-decade lows in May and housing starts in June exceeding expectations, the buildup of reserves will be less intense in the third and fourth financial quarters, he added.

“Although trade uncertainty remains a key risk to the outlook, other factors have become more supportive, such as the Canadian unemployment rate hitting multi-decade lows in May (5.4 per cent) and housing starts in June materially exceeding expectations,” he said in a recent note.

However, the U.S. Fed’s recent interest rate cut and the possibility of the Bank of Canada cutting rates in early 2020 are going to weigh on the bank’s profit margins going forward, Dechaine added.

“After two years of benefiting from rate-driven margin expansion, the outlook has reversed completely… We expect margin guidance to become more conservative, which could become reflected in 2020 forecasts. Not all is lost, though, as declining rates could stimulate the Canadian housing market (we believe it already has).”

Companies in this story: (TSX:RY, TSX:TD, TSX:BMO, TSX:BNS, TSX:CM, TSX:NA)

Armina Ligaya, The Canadian Press

Just Posted

N.S. senior whose birthday card request drew international response dies

SYDNEY, N.S. — A Nova Scotia widower who received thousands of birthday… Continue reading

Freedom of expression or personal attack? Nurse appeals fine for Facebook post

REGINA — Saskatchewan’s highest court is to decide what’s next for a… Continue reading

RCMP commissioner says info in FBI probe led to arrest of intelligence director

OTTAWA — An RCMP employee charged with trying to disclose secret information… Continue reading

NDP’s Singh seeks urban support with housing billions, avoids deficit questions

OTTAWA — Jagmeet Singh continued his push to win progressive votes on… Continue reading

B.C. won’t use court ruling as tactic in pipeline battle: environment minister

VANCOUVER — Environment Minister George Heyman says British Columbia can’t stop the… Continue reading

WATCH: 2019 Canada Winter Games will leave a lasting legacy, say organizers

It leaves Red Deer with the infrastructure and confidence to host future such events

Your community calendar

Wednesday Central Alberta Historical Society annual general meeting is 6 p.m. at… Continue reading

N.S. senior whose birthday card request drew international response dies

SYDNEY, N.S. — A Nova Scotia widower who received thousands of birthday… Continue reading

Freedom of expression or personal attack? Nurse appeals fine for Facebook post

REGINA — Saskatchewan’s highest court is to decide what’s next for a… Continue reading

RCMP commissioner says info in FBI probe led to arrest of intelligence director

OTTAWA — An RCMP employee charged with trying to disclose secret information… Continue reading

NDP’s Singh seeks urban support with housing billions, avoids deficit questions

OTTAWA — Jagmeet Singh continued his push to win progressive votes on… Continue reading

B.C. won’t use court ruling as tactic in pipeline battle: environment minister

VANCOUVER — Environment Minister George Heyman says British Columbia can’t stop the… Continue reading

Parties spar over what is best for parental benefits

OTTAWA — Is it better to be paid in credit or with… Continue reading

Alberta spends $3M for 30 nurse practitioners for remote, specialized areas

Province spends $3M for 30 nurse practitioners for remote, specialized areas EDMONTON… Continue reading

Most Read