RE:Friday Around 3pm Bank earnings are coming... maybe it's a reflection of better than analyst's expections... we'll know on Tuesday!
As investors try to gauge the extent of the economic slowdown, a big clue is set to arrive next week when Canada’s biggest banks start to report their latest quarterly financial results.
Will these linchpins of the economy reveal something important?
Bank of Nova Scotia will kick off the banks’ fiscal third-quarter earnings season on Aug. 23, followed by Royal Bank of Canada and National Bank of Canada on Aug. 24.
Toronto-Dominion Bank and Canadian Imperial Bank of Commerce will report their quarterly results on Aug. 25. Bank of Montreal will conclude the flurry of results from the Big Six on Aug. 30.
Analysts aren’t expecting anything dramatic. Loan growth will continue at a strong clip, while provisions for credit losses remain low.
However, profit growth will falter from weaker capital markets activity and wealth management. Scott Chan, an analyst at Canaccord Genuity, expects bank profits will rise by just 1 per cent from the third quarter of last year.
But this is far from a ho-hum reporting season that investors can ignore, because it arrives at a time when rising interest rates are dampening economic expectations and raising concerns about the financial health of Canadian borrowers.
“Even though the bank stocks have shown strength more recently, we believe investors will continue to remain conservative, and look for signs of strengths (or cracks) in the banks’ results to better inform the path forward,” Joo Ho Kim, an analyst at Credit Suisse, said in a note.
Bank stocks are already reflecting some concerns.
Though they have rebounded over the past month, stock prices are down 14 per cent since November. Relatively low valuations, in terms of price-to-book and price-to-earnings ratios, also appear to suggest that stocks are priced for trouble ahead, if not an outright economic contraction.
“At this point, we are wondering if too much negativity has been reflected,” Gabriel Dechaine, an analyst at National Bank Financial, said in a note.
He pointed out that forward P/E ratios, which are based on estimated earnings, are 9 per cent below the historical average. And the decline in price-to-book ratios from their recent peak implies a 50-per-cent probability of a recession.
The banks’ financial results may shed some light on whether this dip in valuations is justified.
The Bank of Canada has raised its key interest rate by a total of 2.25 percentage points since March in an attempt to control soaring inflation. Though higher rates make lending more profitable for banks, they can also weaken consumer and business demand for loans.
“Loan growth remains strong for now. However, we expect a deceleration of growth in the coming quarters as demand for credit tempers with higher borrowing costs and a slowing economy,” Paul Holden, an analyst at CIBC World Markets, said in a note.
He expects healthy lending activity in the banks’ third quarter will contribute to full-year loan growth of 12 per cent in 2022. But he thinks annual growth will slow to just 4 per cent in 2023, as higher interest rates work their way through the economy.
Credit health is the other key theme to watch this quarter, as the banks provide insight into the ability of borrowers to meet their debt obligations.
“Although a still positive economy and employment landscape remains constructive for credit, increasing recessionary concerns could weigh on the banks’ forward looking credit scenarios,” John Aiken, an analyst at Barclays, said in a note.
The credit picture had been improving since the banks socked away enormous provisions near the start of the pandemic, in 2020, to handle the severe economic fallout from initial lockdowns. Today, insolvencies are below levels seen before the pandemic and credit card losses remain low.
But analysts expect banks may turn more cautious, especially with large U.S. banks building their financial buffers in anticipation of a slowdown.
Canadian banks had been releasing their financial reserves as the economy healed, boosting profits, but that may stop this quarter. Banks may even add to their provisions for losses, according to RBC Dominion Securities.
As well, Mr. Aiken expects that banks may temper their enthusiasm for share buybacks in an effort to preserve capital and may pause on dividend increases this quarter after recent hikes.
The health of the economy is one of the thorniest issues facing investors right now. The banks should provide some clarity.