Good morning. In focus today, we’re looking at why analysts are more exercised than usual over Canada’s bank earnings, which all take place over two days next week.
Up first
In the news
Deals: Canadian miner Sherritt International Corp. is nearing a sale to a former Trump administration official at a discount to its already depressed share price after U.S. sanctions on Cuba forced the company to suspend its Caribbean operations.
Security: A former Huawei subsidiary is planning talks with the federal government to enter Canada.
Climate: Advocacy group Investors for Paris Compliance is shutting down.
Economy: Small grocers are worried about industry imbalance because of an increase in fuel surcharges.
Us watching the bank earnings next week.draganab/iStockPhoto / Getty Images
In focus
Why we’re jumping on bank earnings
CIBC Capital Markets analyst Paul Holden and his team perhaps said it best in a recent note to clients: “Six banks, two days – it’s going to be a banger.”
Canada’s major banks are reporting earnings against a mix of strong market activity, weak loan growth, rising credit caution and bank stocks that have already priced in a lot of good news.
This isn’t exactly the stuff of Glastonbury, but as far as two days on the TSX go, it makes for an undeniably interesting lineup.
From six banks reporting over two days, here are four themes we’re watching:
1. A high bar for success
Canada’s largest lenders have lofty expectations to clear.
The banking giants might report another round of earnings beats, but analysts are warning that results driven by capital markets may no longer be enough to push shares higher.
Big Six bank stocks have gained 7.6 per cent since first-quarter reporting, leaving valuations well above historical averages. (Valuations measure how much investors are willing to pay for a company relative to its earnings.)
Scotiabank analysts said bank valuations now look “frothy,” suggesting investors already expect another quarter of large earnings beats. But they said higher valuations are partly justified by larger capital cushions, better risk management and the banks’ ability to benefit from strong capital-markets activity.
Canadian bank stocks have also benefited from a “positive halo effect” tied to the country’s resource-rich economy and a “pro-business Carney government,” BofA Securities analyst Ebrahim Poonawala wrote in a note to clients yesterday. That has allowed investors to look past weakness in jobs and housing, as well as uncertainty around trade with the United States, he said.
2. Capital markets carry earnings again
Trading and investment banking are expected to do much of the heavy lifting, although results are forecast to come down from last quarter’s unusually strong levels.
Still, Scotiabank expects capital-markets earnings to rise 13 per cent from a year earlier.
During the quarter the banks are about to report, Canadian trading volumes were up 55 per cent from a year earlier, U.S. equity trading volumes were stronger, and equity and debt capital-markets activity also picked up. Those conditions are expected to support trading desks, investment-banking fees and wealth-management divisions.
Individual results may vary: National Bank and Royal Bank might be better positioned for capital-markets upside, analysts wrote, helped by their market exposure and deal activity. TD may benefit less because capital markets account for a smaller share of its earnings.
3. Credit losses on watch
But analysts are questioning whether the Big Six can keep riding heavy trading volumes and deal-making while household loan growth stays weak and credit costs edge higher.
Provisions for credit losses – the money banks set aside for loans that may not be repaid – are expected to rise. Delinquencies of more than 90 days edged higher last quarter across credit cards, unsecured lines of credit, mortgages and auto loans, The Globe’s Stefanie Marotta reported.
Banks said then that they expected early-stage delinquencies – missed payments before borrowers become seriously overdue – to improve if unemployment stabilized.
Instead, unemployment rose to 6.9 per cent in April. Analysts at CIBC had expected provisions tied to loans already showing signs of trouble to peak in the second quarter and then gradually improve. They now expect them to stay elevated for longer, citing a weaker Canadian economy, higher inflation, higher borrowing costs and limited progress on U.S. trade talks.
The banks’ average total PCL ratio is expected to lift a little higher this quarter – nothing eye-popping – but “the trajectory for PCLs will likely gain in importance this quarter,” the CIBC analysts wrote.
4. Loan growth remains weak
Scotiabank analysts described loan volumes as “anemic,” citing continued weakness in residential secured lending and mildly better volumes in business lending.
They said recent data from Canada’s federal banking regulator showed domestic loans grew only 0.3 per cent month-over-month in February, including effectively no growth in domestic residential mortgages.
That flat trajectory is likely to hold through the remainder of the year, the analysts wrote. Improving commercial and industrial lending south of the border may provide a partial offset for banks that have more exposure there, like BMO. (Again, not so much TD, which is limited in this case by its indefinite asset cap in the U.S.)
The lineup
Wednesday
- Bank of Montreal
- Bank of Nova Scotia
- National Bank of Canada
Thursday
- CIBC
- Royal Bank of Canada
- TD Bank
Charted
Own goal?
Public funding from all levels of government to support this summer’s World Cup events will exceed $1-billion, according to an analysis released Wednesday by the Parliamentary Budget Officer. That works out to $82-million per game (or US$59.6-million) for the 13 matches taking place in Vancouver and Toronto.
Quoted
From the shores of Havana to the banks of the Panama Canal, we will drive out the forces of lawlessness and crime and foreign encroachment.
— U.S. President Donald Trump
Cuba’s ex-president Raúl Castro was indicted in the U.S. on murder charges.
Up next
More files we’re following
Before the bell: Earnings today include flight-simulation company CAE Inc. and everything-seller Walmart.
By the numbers: Today: Not much by way of economic reports. Tomorrow, Statistics Canada reports retail sales for March. The University of Michigan’s closely watched Consumer Sentiment Index is expected to show U.S. households under pressure.
Morning update
European stocks rose and most Asian markets surged as investors mulled tentative signs of progress in Iran peace talks, and forecast-beating results from Nvidia and averted labour action at Samsung had mixed effects on chipmaker stocks.
Wall Street futures were mixed, while TSX futures pointed lower.
Overseas, the pan-European STOXX 600 was up 0.35 per cent in morning trading. Britain’s FTSE 100 was little changed, Germany’s DAX rose 0.50 per cent and France’s CAC 40 advanced 0.34 per cent.
In Asia, Japan’s Nikkei closed 3.14-per-cent higher, while Hong Kong’s Hang Seng finished 1.03-per-cent lower.
The Canadian dollar traded at 72.64 U.S. cents.