Pressure building in coming quarters for Canadian banks: Veritas
While Canada’s bank executives claim they are prepared for the worst amid second-quarter earnings reports, one investment analyst says that it may not take all that much to pressure share prices.
“I think that’s a fair sentiment,” Nigel D'Souza, a financial services analyst at Veritas Investment Research, told BNN Bloomberg on Friday when asked if even a normalization in Canada’s housing market or the credit cycle would be enough to spell trouble for the banks.
“If you look at the last mini-credit cycle we had in 2015-16 related to oil and gas, there wasn’t a material uptick in loan losses for the banks but there still was a substantial price correction for the shares,” he added.
“If you have a normalization of credit risk, historically, that’s consistently led to pricing pressures for multiples in the sector, as well as the share prices for these banks.”
Three of Canada’s big banks – Royal Bank of Canada, Toronto-Dominion Bank and Canadian Imperial Bank of Commerce - reported second-quarter earnings this week, with the remainder scheduled for next week.
Canada’s banks came under fire in the recent quarter as short-sellers – most notably from “The Big Short” portfolio manager Steve Eisman – stated that the banks were vulnerable to a potential downturn in the credit cycle.
However, in post-earnings interviews with BNN Bloomberg, two top execs reiterated that their respective banks can weather any coming storms.
“We don’t see it right now. We don’t see those dark storm clouds on the horizon yet,” RBC chief financial officer Rod Bolger said on Thursday. “But, if we do see them, we’re ready.”
TD CEO Bharat Masrani likewise wasn’t buying into the dark prophecies.
"You know, we've had extraordinarily low loan losses," he told BNN Bloomberg in an interview on Thursday. "The credit environment has been very benign. So you're bound to see at this stage in the cycle some normalization occurring; and we are seeing some losses coming through as you expect in any economy."
However, D’Souza – who fueled some of the short-selling fire earlier this year by downgrading all of Canada’s banks to a sell rating - cautioned that economic trends point to a buildup in consumer credit risk.
“Given lower GDP growth, lower wage inflation expectations, we see pressures building over the coming quarters and you could see – although it’s lagging right now – some buildup of consumer credit risk,” he said.
He also added that a greater focus on wealth management among the Canadian banks is not a sufficient hedge against a market downturn.
“Wealth management still remains a cyclical business,” he said. “While it’s good for earnings, it’s not necessarily a diversifier if we’re late-cycle and the cycle turns because it would coincide with maybe an economic recession or more softness in the outlook for growth.”