TORONTO - The ongoing oil price plummet and a spate of bleak economic indicators have sparked renewed concerns about Canada's banks, which are set to report their third-quarter results next week.
“The results reported so far this year have been better than expected,” CIBC analyst Robert Sedran said in a note to clients.
Indeed, despite concerns that low oil prices could hurt the banks' lending books, the big Canadian banks have continued to report strong earnings growth each quarter.
However, Sedran cautions that economic troubles could start to weigh on their results - if not directly, through higher loan losses, then indirectly, by hurting loan growth and other sources of revenue.
Both consumers and corporations may become hesitant to take on debt now that the oil price seems likely to “languish at low levels for a prolonged period,” Sedran said.
After experiencing a brief rally, crude has taken another plunge recently. The benchmark price is hovering just above US$40 a barrel, which is considered to be the price required for many Canadian oil producers to turn a profit.
Sedran says it's not surprising that the impacts of the low oil price have yet to be fully felt by the banks - and it's possible they won't be reflected in this quarter's results yet, either.
“Whatever the outlook for the oil price and the Canadian economy, there was always going to be a lag period before any impact would be felt. We think we are still in that lag period,” Sedran said, noting that historically, such problems creep into banks' results over the course of two or three years.
The Bank of Montreal (TSX:BMO) will kick off the earnings parade on Tuesday, followed by Royal Bank (TSX:RY) and National Bank (TSX:NA) on Wednesday and CIBC (TSX:CM) and TD Bank (TSX:TD) on Thursday. Scotiabank will wrap up the week, reporting its quarterly earnings on Friday.
Gareth Watson, vice-president of investment management and research at Richardson GMP Ltd., says investors will be looking to the results to determine how well the lenders are coping with the tough economic conditions.
“The question is, in an environment where it's become a little bit more difficult for these banks to increase revenues, how much have they reacted on the cost side to meet earnings expectations?” Watson said.
“When the economy is not performing as well and you can't grow revenues as much as you want, you go after reducing costs to try and get your earnings line to where you want it to be, and I think that will be the big reveal next week - how far have the banks gone in terms of trimming costs?”
Barclays analyst John Aiken says two interest rate cuts from the Bank of Canada this year have cut into banks' net interest margins - the money that banks earn on the loans they provide.
That's despite the fact that the big lenders failed to pass along the Bank of Canada's full 25 basis point interest rate cuts to consumers, cutting their prime rates by 15 basis points each time, instead.
“We believe that ongoing margin compression will continue to linger through 2016,” Aiken said in a note to clients. “The likelihood for higher interest rates, and resulting margin relief, continues to move farther down the road.”
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