Armana Liga, Canadian Seal
Posted Sunday, November 25, 2018 11:06 EST
TORONTO – Canada's largest banks are expected to close the strong financial year, helped by rising interest rates and favorable credit conditions with a "whimper" per quarter.
Nova Scotia's bank is the first of its colleagues to report their earnings for the three months ended October 31 on Tuesday, with the fourth quarter expected to provide a stable but quiet end of the year of strong growth and profits well above estimates 12 months ago, said CIBC Capital Markets analyst Robert Serran.
"The end of the year with shouts may be exaggerated given the still strong growth we are expecting this year, but this time we see less positive catalysts than we saw in earlier quarters," he said in a recent customer note.
The Royal Bank of Canada reports on Thursday, followed by the Canadian Imperial Bank for Trade and Toronto-Dominion Bank on Thursday. The Bank of Montreal and the National Bank of Canada will present their results the next week on 4 December and 5 December respectively.
Analysts expect the largest financial institutions in the country to generate collective profit growth per share to 12% in the fourth quarter compared to the same period last year.
This would be extremely unbearable for the financial year, whose outlook was overshadowed by concerns about domestic mortgage demand, new tightening lending rules and North American Free Trade Agreement negotiations.
The Canadian housing market appears to have adapted to the unsecured mortgage rules that were introduced on 1 January. In September, the United States and Canada managed to reach an agreement, which is in principle called an agreement between the US and Mexico-Canada.
Meanwhile, the rise in Bank of Canada's interest rates this year has helped increase net bank interest rates – the difference between the money they get from the loans they make and what they pay to the savers.
"After the five interest rate increases over the past year, we expect marginal expansion to continue to rise," said John Ickon, an analyst at Barclays in Toronto, in a recent note to customers.
"And as the economy of Canada remains positive, we expect the volume of lending to rise higher to close the year."
Canadian loan growth remains strong, with robust commercial lending offsetting the slowdown in personal lending, said Scott Chan, an analyst at Canaccord Genuity in a note to customers. However, capital markets in the United States posted a slight quarter, and stock market growth in October will have negative effects on banks' asset management business, he added.
Still, credit conditions continue to be favorable, and banks with exposure in the US are likely to benefit from lower taxes, said Sohrab Moaheddi, an analyst at BMO Capital Markets.
"The Group's earnings fundamentals remain broadly intact in the foreseeable future with a favorable credit environment, focusing on improving efficiency and raising central bank interest rates, helping to offset the moderation of prospects for economic growth in Canada," he said .
Despite favorable conditions, inventories of Canadian banks declined and market moods were weak among the weaker stock market as a whole.
Based on the cost-to-earnings ratio, which means a current fund's earnings per share, Canadian banks are traded at 9.6 times below the average of 11.1 times, said Aiken.
"While the ratings of the banks were caught in the broader market, we believe investors are concerned that the internal operating environment remains controversial, which is underlined by the slower growth of loans and the economic cycle, probably in the later innovations, he said.
However, the relatively diverse banks' business to cope with delays, the steady increase in single-digit earnings and the solid dividend, "offer insurmountable counter-points for the removal of bears," he added.
Probably more important than the real income that is being emitted during this quarter are the signals from bank managers about what they expect next year, analysts say.
One of the topics to be carefully monitored is the trends in mortgage markets after the revised warranty guidelines led to a rise in housing loans to their lowest level for decades, said Gabriel Dechain, an analyst at the National Bank of Canada.
Mortgages in the first half of the last financial year were increased by housing loans, which were blocked before the revised unsecured mortgage rules came into effect on 1 January. Any reference to the probability of zero or possibly negative growth in mortgage lending in the coming year is something that needs to be monitored, Deceen said.
It will also comment on signs that Canadian home buyers are turning to creditors who are not subject to new credit lines that include a stress test to assess whether borrowers will be able to service their mortgage, if interest rates rise.
A recent Teranet report, which shows that nine percent of mortgages in the Big Toronto area in the second quarter are "private creditors" – six percent in the previous year, Dechaine notes.
"We are curious to hear what banks think about clear signs that shadow banks in Canada are getting bigger."