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Canadian Imperial Bank of Commerce will report its results on Wednesday, followed by Royal Bank of Canada and Toronto-Dominion Bank on Thursday. Next week, look for results from Bank of Nova Scotia on May 28, Bank of Montreal on May 29 and National Bank of Canada on May 30.

Nathan Denette/The Canadian Press

Canadian bank stocks are lagging the S&P/TSX Composite Index this year amid concerns about slumping home sales, rising loan losses and a deteriorating outlook for the Canadian economy – adding to the importance of the banks’ second quarter financial results, which kick off this week.

Canadian Imperial Bank of Commerce will report its results on Wednesday, followed by Royal Bank of Canada and Toronto-Dominion Bank on Thursday. Next week, look for results from Bank of Nova Scotia on May 28, Bank of Montreal on May 29 and National Bank of Canada on May 30.

Analysts are hardly upbeat, but most acknowledge that bank stocks are cheap, and they are expecting dividend increases from BMO and National Bank.

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On average, analysts expect quarterly profits for the big banks will increase by just 4 per cent, year-over-year, and 2 per cent from the previous quarter. However, confidence has been shaken: Four of the six banks missed analysts’ expectations last quarter, when volatile stock markets weighed on capital markets activity in particular.

This time, the attention is largely focused on the domestic housing market – an important contribution to the financial performance of big banks, given that mortgages account for about 50 per cent of their loan books.

“For bank stocks to deliver stronger relative returns in the second half (which they have done in each of the last eight years and about 80 per cent of the time since 2005), recessionary concerns clearly need to fade. One factor that could help is improved sentiment towards the housing sector (and the mortgage market),” National Bank Financial analyst Gabriel Dechaine said in a report.

The sector has been sending mixed signals recently. National home sales activity slumped 9.1 per cent, month-over-month, in February according to the Canadian Real Estate Association. And in Vancouver, things look particularly bleak. There, home sales declined 29 per cent in April, year-over-year.

The banks also reported a sharp rise in their loan losses during the fiscal first quarter reporting season, which added to concerns about the health of their lending activities. Provisions for credit losses, or money set aside to cover bad loans, jumped by an average of 37 per cent year-over-year. Although some of this increase was due to unusual “one-time” losses, the gain nonetheless raised questions about whether the run of historically low loan loss ratios in recent years is nearing an end.

“We believe these ‘one-off’ or ‘idiosyncratic’ losses are likely to become more frequent and credit metrics could begin to show signs of deterioration. We have positioned our forecast to account for this, and call for a controlled increase in loan loss ratios from fiscal 2018 levels,” Robert Sedran, an analyst at CIBC World Markets, said in a note.

There is some good news here, though. Although falling bond yields – the yield on the Government of Canada five-year bond has fallen to 1.55 per cent from a multiyear high of nearly 2.49 per cent in October – are compressing margins on loans, the retreat suggests that borrowing costs are easing after a sharp run-up last year.

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Already, there are signs of a stabilizing housing market in some urban areas, which could drive demand for mortgages. In Toronto, home sales rebounded 16.8 per cent in April, year-over-year, while the average sales price rose 1.9 per cent, according to the Toronto Real Estate Board.

“In our view, the (historically) seasonally stronger mortgage spring season seems to be off to a decent start (albeit with some continued softness in Vancouver), which should be viewed favourably for the banks. However, this is only one month into what is typically a seasonally stronger time for the housing/mortgage market, and we think a single month of unfavourable data could be viewed quite negatively by the market,” Darko Mihelic, an analyst at RBC Dominion Securities, said in a note.

Comments from bank executives during the coming quarterly conference calls with analysts could add some detail to these trends – and provide some insight into whether stock valuations deserve to be well off their historical average of about 11-times earnings.

“At less than 10-times our fiscal 2020 estimates, valuations are compelling for longer-term investors, though we still assume the shares will largely track with earnings growth from here and prefer to consider valuation as downside support rather than upside opportunity,” Mr. Sedran said.

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