If you look forward to Canadian banks' earnings season with the anticipation of a kid on Christmas Eve, the three-week wait until Royal Bank of Canada kicks off the reports on Nov. 29 must be sweet agony. But there's a little package already under the tree that you can shake and rattle to get an idea of what gifts are coming your way: HSBC Canada.
The Canadian division of global giant HSBC Holdings PLC publicly reported its third-quarter financials Wednesday – just as it does every quarter, despite not being a publicly traded entity. That's quite convenient for bank watchers, actually; the fact that HSBC Canada works on a calendar year, rather than the fiscal year ending Oct. 31 on which Canada's other big banks operate, affords the market an early glimpse of how the sector is doing well before the bigger names release with their quarterly numbers. (HSBC Canada has $84.5-billion in total assets, less than half the size of the smallest of Canada's Big Six banks, National Bank of Canada.)
Analyst John Aiken of Barclays Capital parsed HSBC Canada's results, and came up with a list of what they point to for the broader Canadian banking sector in the coming reporting period. "Over all, we believe HSBC's results point toward a challenging end to 2012 for Canadian banks," he concluded.
While he noted that the different quarter-ends make direct parallels a little tricky, he said the HSBC Canada results still point to some key trends to watch for:
Continued margin pressures
Despite steady lending volumes, HSBC Canada suffered a 9-per-cent drop in net interest income compared with a year earlier – evidence of squeezed margins. Mr. Aiken said the other banks may well suffer the same fate. "Industry data indicate lending volumes appear to be holding steady, while margins remain under pressure, but not significant compression, in our opinion." He said he expects the Big Six will still manage "modest net interest income growth," due to "resiliency" in lending volumes.
Cost management remains a focus
"We believe the Canadian banks will continue to emphasize cost controls, and positive operating leverage, as they head into 2013, however, note that the fourth quarter typically results in an uptick in costs," Mr. Aiken wrote. "We maintain cost containment will be one of the key differentiators in determining relative earnings performance."
Resilient capital markets
He noted that HSBC Canada saw "marginal improvement" in its trading results, and noted that industry data points to improved underwriting and advisory revenues for the banks as a group this quarter. "Although the capital markets environment remains challenging, we believe capital markets revenues should prove resilient in Q4, forecasting modest sequential growth for the quarter."
Less reliance on the 'credit tailwind"
Mr. Aiken noted that HSBC Canada's results included a 20-per-cent jump in loan impairments and credit provisions over the second quarter – evidence that the banks can no longer count on shrinking loan-loss provisions to bolster their numbers. "We believe that the credit tailwinds enjoyed by the Canadian banks through to 2012 have largely ebbed, and continue to forecast absolute and relative provision growth for the Canadian banks on the back of moderating credit improvements within their domestic portfolios," he wrote.
David Parkinson