Reaction mixed to Big Six banks' mixed results

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Only two of Canada's Big Six banks managed to exceed the Street's expectations in the second quarter, a period broadly defined for the group by mixed results. Though revenue from domestic retail banking increased and credit losses declined, these benefits were offset by falling trading revenue and weak international business.

Although the quality of the banks' loans generally improved, weak global economic growth and the strong Canadian dollar crimped results. At the same time, there were no dividend hikes, which remain unlikely while governments weigh the introduction of an international bank tax and global talks continue on setting new capital ratio requirements.

RBC CIBC and TD Bank all reported profitable quarters last week, but they missed targets and their stock prices have since fallen. RBC shares are off 7.4 per cent, CIBC shares have fallen 3.6 per cent and TD's stock is down 1.9 per cent.

But BMO and Bank of N.S. both topped consensus targets. Their shares have risen 7.6 per cent and 5.3 per cent, respectively, since issuing their results.

Scotiabank received the strongest market reaction because it has less exposure to the United States than its competitors, focusing its international expansion efforts instead on Latin America and Southeast Asia, said David Baskin, president of Baskin Financial Services Inc. in Toronto.

On the flip side, RBC shares have suffered because the bank has significant exposure to commercial and residential loans in the U.S. southeast. "It's not poorly managed, it's just exposed to the wrong geography right now," Mr. Baskin said.

His firm holds stakes in Scotiabank, RBC and National Bank of Canada. Shares of National are almost unchanged since the bank released results in line with expectations.

"We're not looking for surprises on the upside. We just don't want surprises on the downside, and we like to see the dividends go up," Mr. Baskin said. He expects to see the banks begin increasing payouts within the next six months, after international tax and regulatory issues have been determined.

RBC delivered the biggest miss of the season, reporting share profit of 96 cents, when analysts were calling for $1.10. The bank attributed most of its miss to weak revenue from trading operations, which decreased 43 per cent from a year earlier, to $858-million. RBC was able to reduce its provision for credit losses by 48 per cent from a year ago, but analysts pointed to some weak momentum, particularly in wholesale banking, which serves institutional and large corporate clients.

"Over all, the quarter was disappointing," Robert Sedran, of CIBC World Markets Inc., wrote in a research report. "While we still believe that [RBC] is relatively well positioned in a recovering environment, we have taken our rating to 'sector performer' from 'sector outperformer' to reflect our view that the shares will have difficulty outperforming in the near term as concerns over earnings quality weigh." The analyst cut his price target to $65 from $69.

TD is the most-favoured stock by analysts at the moment, with 12 of 14 analysts that follow the bank rating the shares a "buy." TD's Canadian retail banking operations made a record $761-million in the quarter, up 29 per cent. Provisions for credit losses dropped 10 per cent, reflecting improved loan repayment rates in Canada.

Mr. Sedran pointed to TD's strong retail business, as well as a faster-than-expected decrease in loan losses, for his bullishness on the stock. He raised his target by $1, to $85. At the same time, he increased his rating on TD's stock to "sector outperform," from "sector perform."

TD's credit quality proved better than analysts expected, but its revenue from trading decreased by more than anticipated. That led the bank to miss the Street's numbers, but Mr. Sedran said the most important thing is that "earnings quality" improved.

Andre-Philippe Hardy, of RBC Dominion Securities, also raised his target on TD shares by $1, to $86. He cited the bank's growth potential in retail banking, limited exposure to a slowdown in trading revenue this year and improvement in U.S. credit trends for his "outperform" rating on the stock.

Michael Goldberg, an analyst with Desjardin Securities Inc., said in a research note this week that Canada's banks are unlikely to boost dividends this fiscal year. He rates Scotiabank his "top pick" among the sector, with a price target of $56.50, saying the bank's dividend payout ratio is likely to come down to 48 per cent this year and 41 per cent next year, leaving it in a strong position to resume dividend growth, he said.

Stock performance of the Big Six banks