Bay Street will be awash in numbers this week as a virtual tidal wave of bank earnings hits all at once, leaving investors to wade through what analysts are calling one of the most unusual quarters the financial sector has seen in years.
Four of Canada’s six largest banks will report earnings within hours of each other on Thursday, releasing reams of financial data that investors and analysts must scramble to digest.
Bank earnings season, which can sometimes drag out over two or three weeks, has instead been condensed to a few days, kicking off Tuesday with Bank of Nova Scotia and Bank of Montreal reporting third-quarter numbers. They will be a mere prelude to Super Thursday, as one observer dubbed it, in which Royal Bank of Canada, Toronto-Dominion Bank, Canadian Imperial Bank of Commerce and National Bank of Canada all release earnings.
For investors it will be a story of slowing growth. Though all of the Big Six Canadian banks are expected to post large quarterly profits, they won’t see those figures rise as fast as in previous years, which is weighing on the outlook for bank shares.
“Conditions remain challenging,” said TD analyst Jason Bilodeau in a research note on the quarter. The potential for a slowdown in the housing sector is a key focus, along with the stubborn economic recovery in North America, and ongoing fiscal instability in Europe.
The banks gave a multitude of reasons for the scheduling chaos, from the difficulty of finding days when directors can all gather for board meetings to the perils of choosing dates months in advance without consulting rivals. But the reality for investors is that they will have a more difficult task than usual trying to comb through all the data.
“Investors will need to keep a close eye on the ball,” Brad Smith of Stonecap Securities Inc. said in a research note to clients. Adopting a conspiratorial tone, the analyst suggested a bank might take this opportunity to roll out bad news, hoping it gets lost in the noise.
“While we do not think ourselves superstitious, we do believe that in general good news is best savoured slowly while bad news is best delivered quickly,” Mr. Smith said.
As household debt levels rose to record levels in recent years, the federal government took steps to cool the residential real estate market by reducing the maximum allowable amortization on insured mortgages and cutting back the amount that can be borrowed against a home in a refinancing. While those measures are expected to slow the housing market, a steady rise in consumer debt over the past few years is also weighing on household borrowing and consumption. This trend is expected to be a prominent feature in this week’s quarterly numbers.
“We have not had a single investor meeting in the past three months that has not focused significantly, if not exclusively, on the outlook for Canada’s housing market,” Mr. Bilodeau said. “We believe that the evidence is building that the sector is now in the early onset of what will ultimately prove to be a material deceleration in housing activity in this country.”
National Bank financial analyst Peter Routledge said growth in demand for consumer credit has fallen to about 2.5 per cent from over 10 per cent in early 2010.
“We view this as a signal that Canadian households no longer have the capacity to borrow at the robust pace of the past decade and have started to reduce their more expensive debt that often carries variable interest rates,” Mr. Routledge said.
It’s a trend that has loomed over Canadian bank stocks for about a year and is now starting to dominate the discussion, since consumer lending accounts for a large part of their revenue. For the first time since 2002, consumer credit in Canada is now growing at a slower pace than in the United States, CIBC’s Mr. Sedran said in a note to clients.
In the absence of rising demand for loans, analysts figure banks will have to cut costs to preserve margins. “With most of Europe fully in recession and America’s economy now underwhelming expectations … Canada has at times looked like an island of prosperity,” Mr. Sedran said. “Yet, with commodity pricing softening and major trading partners slowing, there is only so much heavy lifting that housing and debt-financed spending can bear.”
Concerns over Canadian household debt notwithstanding, bank stocks have shown a few signs of life in recent weeks, including a 3 per cent rise in mid-August. That momentum could continue for lenders who can show they are outperforming their rivals in the quarter.
“Bank stocks have treaded water for most of 2012,” said Sumit Malhotra, an analyst at Macquarie Capital Markets Canada Ltd. “We believe that investing in bank stocks will be based much more on picking your spots from a valuation perspective rather than just buying and holding.”