The good times for Canadian banks aren’t over, despite a growing number of warnings from Big Six executives.
Some of the country’s biggest lenders started sounding alarms during the past quarter, stressing the need for banks to curtail expenses as they head into an era where earnings growth is expected to be harder to come by.
But while the latest earnings reports, which begin to be unveiled on Tuesday, likely won’t be as stellar as they were in the prior quarter, when three Big Six banks posted record profits, they are expected to be good enough to stave off any aggressive cost-cutting measures – and to keep bank shares elevated after their wild run this fall.
“With Canadian unemployment holding steady and credit card filings showing continued improvement in delinquencies, it appears that credit [growth] could again be a tailwind for the banks,” Credit Suisse analyst Gabriel Dechaine wrote in a note to clients.
Despite being heavily indebted, Canadians continue to borrow. Average household debt now amounts to a record 163.4 per cent of disposable income, according to Statistics Canada.
Much of the growth in debt can be attributed to sustained strength in the housing market. No matter how many warnings shots economists fire over frothy housing valuations, Canadians continue to expand their mortgage borrowing at a rate estimated to be between 4 and 6 per cent a year.
Sluggish, but relatively stable, economic growth has helped push the unemployment rate lower, enabling Canadians to pay their bills. In turn, the banks have lowered their credit-loss provisions from quarter to quarter, allowing them to release the money they put aside as buffers against bad loans. That trend is expected to continue in the final quarter of fiscal 2013.
“As goes the Canadian household, so goes Canadian bank valuations,” National Bank Financial analyst Peter Routledge noted.
However, the banks know they can’t rely on consumer borrowing and lower credit-loss provisions forever. Toronto-Dominion chief executive officer Ed Clark recently said that his bank is reviewing its operations, and hinted that one way to save money would be by consolidating some branches, particularly in the United States. Bank of Nova Scotia executives also made comments about trimming fat.
And just last month, HSBC Bank Canada, which reports earnings one month earlier than its peers, touted its “efficiencies,” noting that the bright sports in its earnings included the growth of its commercial loan portfolio and “our success in continued sustainable operating expense savings.”
The concern over finding ways to trim costs may seem odd considering the record profits reported by half of the Big Six banks just one quarter ago and the soaring share prices in the sector. While the S&P/TSX composite index gained 7 per cent over the last quarter, the bank subindex soared 11 per cent.
Housing sales figures, which are made public each month, and credit card delinquency data, which are released quarterly, have been relatively strong and provide little reason for concern. As a result, analysts predict a decent quarter, at least for the personal and commercial banking arms of the banks.
A big question mark, however, hangs over the capital markets operations of the major financial institutions. The volume of underwriting deals in the quarter weren’t stellar and trading volumes didn’t experience a major surge, despite the rising markets. Banks with bigger exposures to fixed-income trading, such as Royal Bank of Canada and Bank of Nova Scotia, may feel the affects of the rough bond markets that plagued their global peers such as Citigroup, Barclays PLC and Credit Suisse.
The banks’ wealth management businesses are expected to offset at least some of this pain. Rising markets tend to convince investors they should deploy more money, and that should allow the banks to earn more from the assets they manage.
However, investors hoping for dividend hikes to keep the rally in bank shares going are likely to be disappointed. After the country’s three largest banks hiked their payouts last quarter, the best chance for an increase this quarter comes from Canadian Imperial Bank of Commerce, according to analysts.Report Typo/Error