Investors in Canada’s bank stocks are hoping for a stronger second quarter than last time – and they’ll likely get their wish. After all, the fiscal first-quarter results could hardly have been more disappointing. Four of the Big Six banks missed profit expectations.
It was the weakest quarter for capital markets revenue and profit in recent memory, with most of the Canadian banks mimicking the dismal performance of the big Wall Street banks in a quarter that saw stock markets plunge at the end of 2018.
“It wasn’t just a weak capital markets quarter,” National Bank Financial analyst Gabriel Dechaine wrote in a note after the first-quarter dust had settled. Earnings in Canadian retail banking slowed to four-per-cent growth from 11-per cent a year earlier. Meanwhile, credit metrics weakened and a slowdown in the country’s housing market showed up in the banks’ mortgage results.
Things are likely to get better in the upcoming fiscal second-quarter results, which will cover the three months ending on the last day of April. Capital markets revenue is likely to rebound, along with the surge in stock markets so far in 2019. Earnings growth is expected to pick up to about 4.5 per cent over 2018’s second quarter. That would be an improvement over the sluggish 2.9 per cent earnings growth the banks posted in the first quarter. Loan losses are expected to stabilize.
“It may not be pretty, but [the second quarter of 2019] should be much better than last quarter,” said TD Bank analyst Mario Mendonca.
Here are the key things to watch for when Canada’s banks report their results:
Residential mortgage results:
Dechaine calls the second-quarter “the real litmus test” for Canada’s residential housing market and the banks’ ability to keep profit in their mortgage books moving higher. And so far, indications are that the spring mortgage season got off to a good start. April data from real estate boards in markets like Toronto and Calgary showed sales volumes increasing from levels a year earlier. The tougher stress-test rules on uninsured mortgages are now more than a year old, meaning they no longer cast a pall over year-over-year comparisons.
“We expect mortgage growth to make a healthy recovery this quarter,” said Mendonca.
But RBC Capital Markets Analyst Darko Mihelic is more guarded. While he also sees encouraging signs in recent real estate sales data, Mihelic cautions the second-quarter results will include only one-month of the spring home-buying season.
Andrew Pyle, portfolio manager with Scotia Wealth Management, said he believes the banks are at a point in the credit cycle where loan losses will inevitably grow larger. In the first quarter, the poor credit numbers were striking. Provisions for credit losses (PCLs) – money set aside for loans a bank thinks may not be repaid in full – rose by 21 per cent on average. But that surge was against unusually low PCLs a year earlier, and included a few large commercial losses that weighed on the numbers, according to Dechaine. “Encouragingly, consumer credit metrics remain in good shape,” he wrote in early March.
Indeed, second-quarter figures on loan losses and other credit metrics could be crucial in shaping the market’s view of where we are in the credit cycle. Another quarter of outsized losses will add ammunition to the view that it will only get worse from here.
All of this comes as bank stocks trade significantly below their long-term average price-to-earnings multiples. The group is now trading at about 10.5 times expected earnings. The long-term average is about 11.4 times. It’s common these days to hear investing professionals say the banks deserve to be trading at a discount to longer-term averages.
Here is a quick look at each bank and what to look for:
Canadian Imperial Bank of Commerce:
Date: Scheduled to report on May 22 at 6 a.m. ET
Expected EPS: $2.99 (up 1.4 per cent from Q2 2018)
Watch for: Possible profit decline in U.S. on larger loan losses.
Royal Bank of Canada:
Date: Scheduled to report on May 23 at 6 a.m. ET
Expected EPS: $2.20 (up 5.1 per cent from Q2 2018)
Watch for: The bank could benefit from an improved capital markets and trading environment.
Date: Scheduled to report on May 23 at 6:30 a.m. ET
Expected EPS: $1.67 (up 4.2% from Q2 2018)
Watch for: After a 10-per-cent dividend hike in the first quarter, TD still has the largest excess capital position among the banks, says Canaccord Genuity’s Scott Chan. How will TD deploy that surplus capital?
Bank of Nova Scotia:
Date: Scheduled to report on May 28 at 6 a.m. ET
Expected EPS: $1.75 (up 3.0 per cent from Q1 2018)
Watch for: Scotiabank CEO Brian Porter will likely highlight the bank’s recent reorganization of its growing wealth management businesses. Analysts see this as a “show me” year for Scotia.
Bank of Montreal:
Date: Scheduled to report on May 29 before markets open
Expected EPS: $2.33 (up 6.4 per cent from Q1 2018)
Watch for: A possible dividend hike to $1.03 per quarter from $1.00.
National Bank of Canada:
Date: Scheduled to report on May 30 before markets open
Expected EPS: $1.51 (up 4.8 per cent from Q1 2018)
Watch for: A possible dividend hike to $0.66 per quarter from $0.65.