Canadian banks’ valuations will come under additional pressure in an economic slowdown: Analyst
Turmoil in the U.S. banking sector will likely set the tone for bank earnings in Canada when reporting begins next week, but CIBC researchers maintain that Canadian lenders are more secure than their American counterparts.
Bank of Nova Scotia and Bank of Montreal are set to report first on May 24, with competitors reporting until June 1.
The earnings preview from analysts at CIBC Capital Markets published Monday anticipated the earnings would reflect “a challenging quarter.”
The report’s authors said they expect negative operating leverage, and bank earnings per share that reflect a quarterly decline of about 10 per cent on average.
U.S. BANK INFLUENCE
The analysts said recent bank collapses in the U.S. will likely shape the narrative this earnings season, although they stressed they are “are not overly concerned about capital for the Canadian banks,” and have confidence in the country’s regulatory environment.
“With the recent bank failures in the U.S., a main focus this quarter will be on funding and liquidity risks and the overall impact to (net interest margins) going forward,” their report said.
Banks with exposure to the U.S. may feel more cost pressures, the report said, and Canadian banks are more likely to be cautious about loans in the near future in light of the U.S. situation.
And while Canadian banks “already have strong liquidity and capital positions,” the analysts said there is “incentive to boost ratios higher” in the current environment, with banking instability on people’s minds.
“This means slowing loan growth and more intense competition for deposits,” the report said, noting that Toronto-Dominion Bank and National Bank of Canada already have “strong liquidity and capital positions.”
The analysts said they consider TD “a more defensive name” now that its planned US$13-billion acquisition of First Horizon Corp. has been called off.
Outlook for net interest margins is “murky,” the report said, with a “downward bias” for now.
Commercial real estate credit risk “has become very topical,” and the CIBC report’s authors said they expect the banks will comment on the topic.
“Overall we expect the message will be that risks are being monitored while current loan performance is okay,” the report said.
The analysts said there is “not much to show” when it comes to credit risk, with the overall credit environment faring better than pre-pandemic.
“While we continue to hear chatter and see news headlines regarding potential credit challenges in the residential mortgage and commercial real estate space, major issues haven’t come up yet,” the report said.
The analysts said they expect banks will work towards higher Common Equity Tier 1 ratios by the end of 2023 “but still announce a modest dividend increase.”
They also saw room for improvement in the banks’ net interest margins later in the year, as the pace of hefty central bank interest rate increases slows.