Bank of Montreal kicks off third-quarter bank earnings when it releases its results on Tuesday.Deborah Baic/The Globe and Mail
As Canadian banks get ready to report third-quarter earnings this week, a sense of déjà vu is descending on Bay Street.
"Extreme volatility has given markets a 2008 type of feel," analyst Sumit Malhotra at Macquarie Capital Markets said in a research note previewing third-quarter earnings. "An already challenging summer for investors in financial services stocks has taken a turn for the worse in August."
Against this uncertain backdrop, three of the Big Six Canadian banks kick off the earnings parade this week, starting with Bank of Montreal on Tuesday, National Bank of Canada on Thursday and Royal Bank of Canada on Friday. Bank of Nova Scotia, Canadian Imperial Bank of Commerce and Toronto-Dominion Bank report the following week.
Some of the most pressing issues roiling the markets in recent weeks – from the U.S. debt downgrade to the European financial crisis – are too fresh to have had much impact on third-quarter results. But the three-month period ending July 31 will be important for another reason. Analysts will parse the data to see exactly where Canadian banks stood heading into the mess that is August.
The good news, Mr. Malhotra and other analysts point out, is that things so far do not look nearly as bad as 2008. "Though we are not bullish on the near-term fundamental outlook for the Canadian banks, we think that comparisons to 2008 are an overstatement," Mr. Malhotra said.
Canadian banks are expected to show headwinds in a few key areas in the third quarter, including loan growth, wholesale revenue and net-interest margins, which are the difference between what the banks make on loans and the interest they pay out on deposits. Here is a brief snapshot of what to look for from the three that are reporting this week.
Tuesday: Bank of Montreal
Bank of Montreal could be left as the only major Canadian bank that has not increased its dividend since the financial crisis of 2008.
Neither BMO nor CIBC has raised its payout since 2007, but some analysts believe CIBC is poised to do so this quarter (along with TD, which has already raised once).
BMO is digesting its $4.1-billion buyout of U.S. bank, Marshall & Ilsley Corp., and likely won't boost the dividend for at least another quarter, putting increased pressure on management. "We do not think that BMO's board will want to endure for long the distinction of being the only Big Six bank to not have raised dividends since the end of the recession," National Bank Financial analyst Peter Routledge said in a research note.
Amid sliding share prices for the sector, the average dividend yield for the Big Six is 4.2 per cent, the highest level for the group since 1996, not including the 2008 crisis, when bank stocks plunged. "While the autumn is likely to be unsettling, investors with strong stomachs may find more opportunities than threats in the Canadian banking sector," Mr. Routledge said.
Thursday: National Bank of Canada
The story in the second quarter for the major Canadian banks was of shrinking margins. Amid low interest rates, banks were undercutting each other on loans to bring in business, squeezing profits. A similar trend is expected to show up in the third-quarter numbers for all the major banks, including National Bank, the sixth-largest lender.
"We are skeptical that this pressure will dissipate quickly since it is experienced against a backdrop of slowing asset and earnings growth after a powerful run that lasted several years," said CIBC World Markets analyst Rob Sedran in a research note.
National could report another dip in its margins this quarter, Mr. Sedran said. However the Montreal-based bank could see an increase in earnings of about 8 per cent over last year, driven by increased lending and a slightly longer quarter. As well, National recently bought Winnipeg-based fund manager Wellington West to bolster its wealth management business. Its full impact on the bank won't be fully seen until next quarter, but there will be a partial glimpse of Wellington's contribution.
Friday: Royal Bank of Canada
Royal Bank posted what many analysts considered a weak quarter three months ago when it was hit by lower earnings in its wholesale banking division. Analyst Jason Bilodeau at TD Newcrest expects RBC will post better results this time on its way to a "decent quarter."
An area where Canada's largest bank might impress, however, is in net interest margins. As the major banks battle each other for loans, often having to choose between lowering prices or sacrificing volume, analysts expect RBC has been able to use its heft to maintain both of those better than the other banks.
After nearly a decade of losses, RBC sold off its struggling U.S. retail banking division in June to Pittsburgh-based PNC Financial for $3.6-billion (U.S.). RBC will likely face questions about how it will spend the proceeds from that sale, with analysts expecting it to continue expanding in wealth management, which RBC has pegged as a priority.
"We will be looking for additional guidance from management on potential deal prospects and targets," Mr. Bilodeau said in a research note.
Grant Robertson