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Analysts expect Canada's Big Six banks - Royal Bank of Canada,
Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal,
Canadian Imperial Bank of Commerce and National Bank of Canada -
to post an average 6% increase in adjusted earnings per share in
the three months through January.
However, excluding the impact of provisions and taxes, earnings
could be lower than a year earlier, with expense growth
outpacing revenue expansion, and lower contribution from capital
markets units following last year's strength, CIBC Capital
Markets analysts wrote in a recent note.
Royal Bank kicks off results reporting on Thursday.
Canadian banks have reported record profits throughout the
pandemic, as strong mortgage lending, trading and deals activity
helped offset an evaporation in demand for other kinds of
credit. Now, with restrictions and accommodative government and
central bank policies coming to an end, the drivers of earnings
are also starting to shift.
"Mortgage growth will continue to be strong, no surprise there,"
said Rob Colangelo, vice president and senior credit officer at
Moody's Investors Service. "But other kinds of lending, credit
card, auto lending, there's some return to growth there."
Credit-loss provisions are also likely to keep trending lower,
with the banks continuing to release capital they had set aside
in anticipation of impaired loans that have not materialized,
Colangelo said.
But expenses are among the biggest uncertainties for the
quarter, particularly related to compensation, driven by a tight
labour market.
"There's a lot of movement, especially in the financial services
sector, and a lot of it is driven by wages," Philip Petursson,
chief investment strategist at IG Wealth Management. "I'm
curious as to how much of an impact this is having on the
banks."
The phenomenon is a global one, with major Wall Street banks
raising pay and bonuses to attract and retain talent,
particularly in investment banking units.
Surging inflation and planned business investments could also
exacerbate cost pressures, even as revenues remain challenged
during the quarter.
CIBC analysts predicted year-on-year revenue growth of just 1%
in the first quarter, noting central bank interest rate hikes
that could help have not happened yet.
"The natural offset to inflation is higher interest rates," they
wrote in a note. "Inflationary impacts are happening now and
rate benefits are in the future." The Bank of Canada is widely
seen raising rates at its March 2 meeting.
A much-awaited improvement in net interest margins may also not
have materialized during the quarter. Although fixed rates on
mortgages have risen, they have done so at a slower pace than
short-term rates, which determine banks' borrowing costs and
have risen in anticipation of central bank rate hikes.
With the Canadian banks index up 115% since its March 2020
trough, compared with an 89% gain in the Toronto stock
benchmark, bank shares have more downside risks, Petursson said.
"If banks surprise to upside, I'm not as convinced we will see a
significant jump up in stock performance," he said. But if the
earnings disappoint, "you could see a sharper hit to the
downside."
(Reporting By Nichola Saminather; Editing by Andrea Ricci)
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