Canadian consumers aren’t borrowing like they used to – this was reflected last quarter when the nation’s banks reported earnings. As the Big Six prepare to unveil their fiscal second-quarter numbers this week, that trend is expected to have a bigger impact.
Consumer lending won’t be in decline for the banks, but it will expand at a slower pace than before as households, on average, continue paying down debt.
This will be one factor that should keep a lid on revenue growth. After surprising Bay Street last quarter with better-than-expected earnings, driven by higher revenue from their trading and wealth management operations, the banks will have a harder time matching those strong performances in the second quarter.
The banks will still be making significant profit, but no big surprises are expected.
“Sluggish top-line [revenue] growth is likely to emerge as one of the most important themes in the Canadian banking sector,” CIBC analyst Rob Sedran said in a research note.
The banks will be looking find growth elsewhere, and business lending will be a key area of focus. The question is whether it can make up for the drop in consumer borrowing as a revenue stream.
There are encouraging signs so far, but they are far from conclusive. In the first two months of the fiscal second quarter, Canadian business borrowing grew by 1.3 per cent, compared to 0.9 per cent for household credit, according to Bank of Canada statistics.
Meanwhile, loan loss provisions – which pumped up bank earnings a year ago when the economy began to improve – are no longer the balance sheet booster shot they were last spring, since the numbers have stabilized.
But even though the banks will have a tough job trying to match their past performances, analyst Peter Rozenberg of UBS is still predicting solid earnings growth of about 13 per cent for the sector as a whole.
Here are a few things to look for from five of Canada’s six largest banks that report this week. Bank of Nova Scotia reports next week on May 31.
Wednesday: Bank of Montreal
Investors looking for a dividend increase from BMO will likely have to wait. Bank of Montreal is expected to be the last of the lenders since the downturn to raise its dividend.
BMO remains focused on digesting the recent $4.1-billion acquisition of U.S. bank Marshall & Ilsley Corp. The deal closes next month, meaning it will have little impact on the quarterly numbers, but analysts will still be looking for key information on the M&I front.
The deal doubled BMO’s U.S. branch network to 700, so attention will be paid to how well customers in Illinois and nearby states are keeping up with their loan payments, as an indicator of what the balance of the year will look like for BMO.
At home, business lending growth will be an important area to watch, since it is where BMO sees much of its near-term revenue growth in Canada. “BMO is amongst the best-positioned banks in business banking which is now improving,” Mr. Rozenberg said in a research note.
Thursday: Canadian Imperial Bank of Commerce
CIBC is a good bet to boost its dividend this fiscal year, but not a favourite to make the move this week. Chief executive officer Gerry McCaughey wants the bank to be in the lower end of its payout ratio and CIBC isn’t there yet.
The bank’s target range is between 40 and 50 per cent, and National Bank Financial analyst Peter Routledge estimates CIBC will be at the upper end of that spectrum in the second quarter. “This suggests a dividend increase in the latter half of fiscal 2011,” he said in a research note.
