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Noah Zivitz

Managing Editor, BNN Bloomberg

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Another analyst who covers Canada's banks is predicting many of the lenders will announce dividend hikes when they report earnings over the coming weeks.

Gabriel Dechaine from National Bank of Canada Financial Markets told clients in a report Sunday evening he expects half of Canada's Big Six will boost their payouts: Royal Bank of Canada, Bank of Montreal, and National Bank. Of the two regional banks he covers, he predicted Laurentian Bank of Canada will hike, while Canadian Western Bank will stand pat.

It's a more modest outlook for dividend hikes than his peer John Aiken, who recently said he expects TD Bank Group will be the only lender that doesn't join a "bonanza" of payout increases this earnings season.

As for the results that will be reported starting on May 25, Dechaine nudged up his earnings per share estimates for all of the Big Six banks (other than Bank of Nova Scotia) one per cent. His estimate for Scotia went up two per cent. Dechaine said his revised earnings estimates reflect rate hikes by the Bank of Canada and the U.S. Federal Reserve.

The Bank of Canada has raised its target for the benchmark overnight interest rate twice so far this year, including a half-point hike to 1.0 per cent last month. The higher cost of borrowing has clouded the outlook for Canada's housing market and has prompted some economists to predict home prices are bound to fall.  

Dechaine acknowledged that the anticipated mortgage slowdown is a "major storyline" for the banks; however, he expects that will be most evident later this year.

"We believe the dropoff will be more acute in the second half. Though a decline in mortgage volumes should only have a minor impact on bank revenue growth, the narrative around the issue is hardly going to be a positive sentiment builder," he wrote in his report.

Credit quality has been a focal point for the banks since the onset of the pandemic. When COVID-19 took hold, they set aside billions of dollars for loans that could potentially go bad. However, the tidal wave of defaults never materialized and so the banks' profits have been boosted in recent quarters as they freed up some of their provisions.

Dechaine stated he expects banks will "moderate" their reversals of loan-loss reserves for performing loans due to "the volatile macroeconomic/geopolitical backdrop that has amplified recessionary concerns."

Here are some of bank-specific themes that Dechaine flagged in his report:

BMO: Dechaine stated he's expecting a "strong" quarter for the bank's U.S. operations, based on a regulatory filing covering the first three months of 2022. (Reminder that Canada's banks will be reporting results for their fiscal second quarter, which ended Apr. 30.)

Scotia: Dechaine said he expects continued improvement in the bank's international operations. "The question remains whether investors will reward this performance improvement or remain cautious due to political risk in the region against a backdrop of 'risk-off' mindset," he wrote.

Canadian Imperial Bank of Commerce: As a bank whose fortunes are often closely associated with the health of Canada's housing markets, CIBC has plenty at stake as rate hikes cool down buying activity. "Although a housing market meltdown is a cause for concern, we don't know why this year's version of the concern is going to generate a different outcome than any of the other periods of concern we've encountered over the past decade+," wrote Dechaine, who said CIBC shares are at the top of his "pecking order" based on what he called an "overdone" correction.

National: This is the other Canadian bank stock that Dechaine said he views favourably heading into earnings, based on its domestic lending activity. He noted National's capital markets business could surprise to the upside due to an easy year-over-year comparison to the fiscal second quarter of last year.

RBC: While Dechaine acknowledged RBC's capital markets unit faced headwinds in the most recent quarter, he said investors "should be stepping in opportunistically" if its shares slump on the results. He pointed to RBC's robust capital position as justifying a premium valuation.

TD: Dechaine flagged several concerns for this bank ahead of its earnings, including the risk of a disappointing performance in its U.S. banking operations. He also questioned if the market has fully accounted for declining overdraft fees.

Bank earnings season starts on May 25, when BMO and Scotia are scheduled to report.