Last time Canada's banks lined up for a reporting season, there was no question what the storyline to watch was going to be. After all, their regulator – the Office of the Superintendent of Financial Institutions – had just lifted its pandemic-era ban on dividend hikes and share buybacks.
Sure enough, the banks, armed with capital levels far exceeding regulatory requirements, showered their shareholders with double-digit hikes to their quarterly payments and announced plans to repurchase millions of their own shares.
Heading into the fiscal first-quarter reporting cycle, however, investors may have to bide their time for the next major catalyst.
And that's because the lenders, like everyone else in financial markets, are waiting for central banks to start hiking their policy rates, which should boost net interest margins, or the difference between what banks charge for loans versus what they pay on deposits.
In a report to clients this week, Paul Holden, who tracks the banks for CIBC Capital Markets, rhetorically asked whether we're about to see the weakest quarter of the year for the sector.
Holden estimates adjusted earnings per share for the Big Six will fall an average of 1.6 per cent sequentially, while year-over-year growth is seen at a modest 3.3 per cent. He expects Bank of Nova Scotia will post the highest year-over-year profit growth (9.1 per cent), while Royal Bank of Canada is singled out for a year-over-year contraction in adjusted profit per share. On average, Holden's profit estimates are 1.6 per cent below the consensus among his peers.
"The rest of the year should look better given the outlook for interest rates and loan growth. Caution into the quarter, bullish thereafter," he wrote.
Holden is calling for a total of six rate hikes through next year. As of Friday morning, data tracked by Bloomberg was showing markets have priced in the equivalent of at least seven quarter-point hikes by the Bank of Canada this year alone.
Before banks enjoy the potential boon in net interest income as central banks lift rates off historically low levels in a bid to lower inflation, Holden listed a number of factors that he said could supress fiscal first-quarter profit growth.
He said he expects revenue from the banks' notoriously volatile capital markets units will be "significantly lower" in the quarter being reported over the next two weeks, starting with Royal Bank of Canada on Feb. 24.
He's also anticipating growth in expenses, and doubts that underlying credit quality will provide as much of a boost to the bottom line, owing to the Omicron variant of COVID-19 and tighter public health restrictions that were in place during the quarter, which covers the three-month period that ended Jan. 31.
On the upside, Holden noted that demand for residential mortgage is still growing, while commercial loan activity is accelerating.
As for how investors should be viewing the banks’ stocks, Holden noted they're trading at higher multiples than their historical average (11.8x versus 10.8x).
Holden pointed to the banks' still-robust capital levels as helping to explain the forward price-to-earnings ratio.
"While valuations look high, we believe the excess capital and allowance buffers that the banks hold partially contribute to the higher multiples," he wrote.
"Dividend yields average 3.6 per cent, below the five-year average of four per cent, but we expect further increases from some of the banks later this year now that capital restrictions have been lifted."
As of the close of trading Thursday, the TSX banks index (which includes the Big Six, as well as Canadian Western Bank, Equitable Group, Laurentian Bank of Canada, and Home Capital Group) had rallied almost 37 per cent over the last year, more than double the S&P/TSX Composite Index's 15 per cent rise. On a total return basis, which incorporates dividends, the banks index has gained 42 per cent.
Holden has neutral recommendations (the equivalent of a hold) on Bank of Montreal, National Bank of Canada, and Royal Bank of Canada. He has outperform recommendations (the equivalent of a buy) on Bank of Nova Scotia and Toronto-Dominion Bank.
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