Bank of Nova Scotia's Mexican operations had a strong second quarter, which helped boost its earnings. But those will likely moderate in the third quarter, raising the question of which other international markets will pick up the slack.PAUL DARROW
Canadian banks that have unveiled third-quarter numbers so far revealed a worrisome theme: The economic and political turmoil in Europe and the U.S. is taking its toll on the financial sector.
Royal Bank of Canada and National Bank of Canada were both hit by sluggish trading revenues as investors stayed on the sidelines amid the economic woes in Europe. They are two of the most heavily focused Canadian banks on capital markets revenue, such as bond trading, equities and investment banking.
This week, it's Bank of Nova Scotia, Canadian Imperial Bank of Commerce and Toronto-Dominion Bank's turn to roll out earnings. Scotiabank, TD and CIBC are mostly focused on personal and commercial banking, such as deposits, mortgages and credit.
In that regard, the lesson seen across all banks lately – that of shrinking net interest margins – will most likely affect them too. Low interest rates have made it tough for banks to widen the margin between the money they bring in on loans and the amount they pay out on deposits, which is eating into profits.
Another theme worth watching this week is which lenders will raise dividends. CIBC has not boosted its payout since the recession and some analysts believe it could be poised to pull the trigger on its first increase in about three years. TD and Scotiabank may be looking at their second hike since that time.
"If patience is a virtue, the virtuous will get paid," analyst Peter Routledge at National Bank Financial said in a research note. He points out that Canadian bank yields are unusually attractive right now, particularly after banks stocks were clobbered in the markets over the past month. Here are some other factors worth watching from the three biggest banks reporting this week:
Tuesday: Bank of Nova Scotia.
Scotiabank is a different breed of bank from the other Canadian lenders due to its focus on international retail banking in South America and Asia. The bank's Mexican operations had a strong second quarter, which helped boost its earnings, but those will likely moderate this time, raising the question of which other international markets will pick up the slack.
Scotiabank could see a boost in overall profit from a healthy decline in provisions for credit losses, or the amount of money banks set aside to cover unpaid loans. CIBC World Markets analyst Rob Sedran expects loan-loss provisions to be down 5 per cent from the second quarter, falling to about $250-million, and well below the $300-million the bank reported a year ago. Compression of net interest margins is also expected.
Wednesday: Canadian Imperial Bank of Commerce.
The big question hanging over CIBC is where will the bank get its future growth? After years of stripping out risk from its operations in an effort to avoid the costly losses incurred in the past by its investment banking arm, the bank has retrenched to Canada.
Even though CIBC recently purchased a stake in American Century, a U.S.-based wealth management firm, it remains a bank much more focused on its own Canadian backyard than it once was. That deal helped invest some of the bank's excess capital, and CIBC may now look to return some cash to shareholders through buybacks or a dividend increase this quarter or next.
"CIBC does not, in our view, have the highest-quality medium-term growth prospects in the group [of Canadian banks]" TD Newcrest analyst Jason Bilodeau said. "In the immediate term, ongoing improvements in the retail business and the use of the bank's relative capital strength should help earnings."
Thursday: Toronto-Dominion Bank.
How the U.S. economy fares will have a major impact on TD's fortunes, since the bank has 1,300 branches stateside. However, as deep as the concerns over the sputtering U.S. economy are these days, there are some bright spots amid the turmoil.
Auto sales have been surprisingly promising in recent months, and with TD investing heavily in the U.S. auto lending market through its purchase of Chrysler Financial, analysts will be watching closely to see how those assets perform. When it comes to other forms of lending though, such as mortgages and credit lines, the low-interest rates forecast in the U.S. for the next two years will be a hurdle for TD's revenue.
"We continue to have a high degree of confidence in the ability of TD to deliver consistently solid results in both Canadian banking and capital markets," Sumit Malhotra, an analyst at Macquarie Capital Markets, said in a research note. "But we think the market is underestimating the challenges all banks are facing in the U.S."
Grant Robertson