Canadian bank headquarters stand on Bay Street in Toronto on Aug. 29, 2011.Brent Lewin/Bloomberg
Canadian banks have now twice been "saved" by their capital markets divisions, but don't count on trading revenues to come to the rescue a third time, said Barclays analyst John Aiken.
So far this year, the banking group has mostly defied growing pessimism amid an increasingly tenuous economic condition.
"Recurrence could be difficult in the seasonally weak third quarter," Mr. Aiken said in a new report. "Heading into Q3, we are forecasting trading revenues will ebb from the elevated levels experienced over the past couple of quarters."
As the domestic economic outlook weakened in the aftermath of the oil rout, many observers began to expect tougher times for the banking sector, which has enjoyed a long, lucrative stretch in the years since the financial crisis.
But those concerns have mostly failed to register in profits. The second quarter saw a clean sweep by the Canadian banks, with all eight – the Big Six plus Canadian Western Bank and Laurentian Bank – beating analyst expectations for earnings.
"On an annual basis, earnings growth remains largely in the mid-single digit territory for the group," Mr. Aiken said. One of the clearest themes apparent in the quarterly results was strength in trading revenues.
Following a first-quarter sequential spike of 22 per cent, capital markets revenues rose by another 7 per cent in the second quarter.
But trading revenues, like the market itself, are notoriously volatile and unreliable. Over the past five years, there has only been one instance where capital markets revenues rose in three consecutive quarters, Mr. Aiken said. Over that time, the third-quarter, which includes the summer months, has been the weakest of the year, generating an average sequential decline of 13 per cent. Barclays is expecting an 11-per-cent drop in the current quarter.
"Although all of the banks managed to exceed the Street's Q2 estimates, tailwinds that had been benefitting earnings are easing and … resiliency in capital markets revenues appears to have a diminishing payoff," Mr. Aiken said.