Canada’s biggest banks are set to report their fiscal first-quarter results starting this week, and once again the focus is on deteriorating economic conditions and slower loan growth – a theme that ran through the latter half of 2018.
Royal Bank of Canada will kick things off on Friday, when it reports results for the three-month period ended Jan. 31. Next week, Bank of Montreal and Bank of Nova Scotia will report their respective financial results on Tuesday, followed by National Bank of Canada on Wednesday.
Canadian Imperial Bank of Commerce and Toronto-Dominion Bank will conclude the reporting season with their results on Feb. 28.
On average, analysts are expecting profit to increase just 3 per cent for the Big Six banks, year-over-year, and a mere 1 per cent from the previous quarter.
The subdued forecast reflects dimming optimism for the Canadian economy.
Many economists believe that the Bank of Canada has put interest-rate increases on hold, at least for the first half of this year. While employment gains were strong in January, there are continuing concerns about the Canadian housing market – where sales in Vancouver and Toronto have declined – and the energy sector, along with global uncertainty regarding trade and even the waning strength of the U.S. economy.
Bond yields, which surged last year in anticipation of rate hikes, fattening bank margins on loans, have fallen substantially. While lower yields will reduce borrowing costs for consumers, they suggest that demand for loans could be tempered if the economy stumbles.
RBC Dominion Securities recently reduced its price targets on a number of Canadian bank stocks, arguing that the various headwinds will leave shares trading at subdued valuations (or relatively low price-to-earnings ratios).
“Our forecast for relatively slower EPS [earnings per share] growth for the banks in 2019 and 2020 largely reflects our view that continued deceleration in domestic loan growth will slow revenue growth,” Darko Mihelic, an analyst at RBC Dominion Securities, said in a note.
He expects that personal loan growth will slow to just 2.9 per cent in 2019, down from 4.1 per cent in 2018, as today’s higher interest rates and sluggish economy weigh on mortgage underwriting activity. As a result, he estimates that revenue expansion for the Big Six banks will slow to 4.3 per cent in 2019, down from 5.7 per cent last year (when adjusted for acquisitions).
But the first-quarter results, in particular, have something else pressing on them: Volatile markets. The S&P/TSX Composite Index, among other major indexes, fell sharply from the end of August through most of December, overlapping with the banks’ fiscal quarter.
Analysts expect that the declines will weigh on banking activities such as trading and asset management.
“Everything from mutual fund fees to underwriting revenues will likely have been down. Trading, as ever, is a wildcard, but we do expect a sequential decline on that line as well,” Robert Sedran, an analyst at CIBC World Markets, said in a note.
The good news? Dividends are set to rise. Analysts expect that RBC, Scotiabank and TD will boost their quarterly pay outs in keeping with their recent pace of increases.
As well, bank stocks, which were hit hard last year, are now recovering nicely. The Big Six are up more than 9 per cent in 2019.
The rebound suggests that share prices may have been reflecting concerns over the economy back in December, when bank stock valuations fell to their lowest levels since the financial crisis a decade ago, and are now anticipating an improvement over the remainder of the year.
Indeed, some analysts believe that the low profit growth for the big banks in the fiscal first quarter will mark a starting point from which the banks will add earnings power as the year progresses, as loan losses remain low, profit margins expand slightly and bank revenue grows at a faster pace than expenses.
Mr. Sedran expects that the Big Six will report earnings growth of 6.5 per cent for fiscal 2019. While that marks a notable slowdown from 12 per cent in 2018, it implies that earnings will improve after a weak first quarter.
“While we share at least directionally the market’s concerns about the age of the economic cycle, we are unconvinced that it will show its age in fiscal 2019,” Mr. Sedran said.
David Berman