Banks feeling pressure

Canada’s biggest banks have weathered the economic downturn better than their peers, but analysts expect that tightened consumer lending will add pressure to profits in the third quarter, and could be a harbinger of further challenges.

Canada’s biggest banks have weathered the economic downturn better than their peers, but analysts expect that tightened consumer lending will add pressure to profits in the third quarter, and could be a harbinger of further challenges.

The banks are set to report their quarterly results starting Tuesday, in what could be one of the shortest earnings periods on record.

Scotiabank (TSX:BNS) and Bank of Montreal (TSX:BMO) are scheduled to report first, while the rest of the big banks wrap it up two days later, on Thursday.

Stonecap Securities analyst Brad Smith suggests the shorter window in which the earnings reports are released could serve as an opportunity for executives to recognize some of the setbacks faced this year, and face less direct scrutiny.

“While we do not think ourselves superstitious, we do believe that, in general, good news is best savoured slowly while bad news is best delivered quickly,” he wrote in a note.

Overall, analysts see the banks heading into a period of lower profit growth that could extend into next year.

CIBC World Markets analyst Rob Sedran expects that overall the banks will post a flat sequential growth of 3.8 per cent in the third quarter, compared to the same time last year.

“The current marco environment is less than fertile ground for bank profit growth,” Sedran said.

“As such, we continue to model modest earnings growth assumptions for the large Canadian banks both for the remainder of this year and into 2013.”

Sedran said the credit card market is leading a slowdown in the country’s consumer credit levels as more Canadians move away from high-interest credit cards. Mortgage activity is also starting to moderate, he said.

The expectations fall in step with comments from the banks earlier this year that signalled a decline in mortgage lending.

A report from TransUnion, released Thursday, showed that consumer debt is actually growing, but mostly due to higher auto loans, while debt on cards and lines of credit was flat.

“I think we’re going to see a lot of the similar themes (that) we saw in the second quarter,” said Dan Werner, a Chicago-based analyst for the Canadian banks at Morningstar.

He suggested in particular that could involve further concern over cost management at the banks. In the second quarter, both Bank of Montreal and CIBC were tightening their expenses.

“If they maintain costs I think that’s a victory,” Werner said of the sector.

“Costs have already been cut down.

“Without actually laying off people I think it’s difficult to reduce your variable costs in this type of environment.”

On the upside, Scotiabank is expected to perform better than most of its peers, helped by international operations that could soften any negative impact in Canada.

Banks that could underwhelm include Royal Bank (TSX:RY), which has a heavy weight in its trading division compared to other Canadian banks, and CIBC, which is grappling with marketshare.

“Earnings expectations for them have actually been creeping up,” said Smith in an interview, noting that those heightened expectations could actually increase the possibility that CIBC underperforms predictions.

In terms of dividends, several banks could be due to boost their payouts, in particular Scotiabank, CIBC (TSX:CM), and TD Bank (TSX:TD), suggested Barclays analyst John Aiken.

“We continue to believe that dividend hikes will mimic earnings growth, as the banks seek to balance market expectations against the pending new capital regime,” he wrote in a note.

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