Canada’s biggest banks will begin reporting their quarterly financial results this week amid expectations for a modest gain in profits. But dividend hikes may have to wait.
Royal Bank of Canada will kick off the fiscal first quarter reporting season on Thursday, reflecting results for the three months ended Jan. 31.
Canadian Imperial Bank of Commerce and National Bank of Canada will report their results on Friday, followed by Bank of Montreal and Bank of Nova Scotia on March 1.
Toronto Dominion Bank will conclude the reporting season with its results on March 3.
Analysts expect that the Big Six will show that profits rose 5 per cent from the same quarter in 2021, and relatively unchanged from the previous quarter, based on consensus expectations.
If that looks disappointing, it’s because the forecast implies a considerably slower pace of growth than last year, when the economic recovery and subsiding loan losses sent profits surging 50 per cent above beaten-down 2020 levels.
“We expect a tough quarter for year-over-year comparisons as we are still waiting for rate hikes, significantly lower capital markets revenue and expense growth due to cost inflation,” Paul Holden, an analyst at CIBC Capital Markets, said in a note.
For that matter, analysts expect that the sectorwide dividend hikes that came with last quarter’s financial results – the first increases in well over a year, owing to pandemic restrictions imposed by the banking regulator – are unlikely this time around, even as banks sit on excess capital and have relatively low payout ratios.
Another reason to cool your enthusiasm for the latest results: Bank stocks have surged 38 per cent over the past 12 months. The rally has raised the price-to-earning ratios for the sector to 11.7-times estimated earnings over the next 12 months. That is slightly above the historical average P/E of 11, according to Scott Chan, an analyst at Canaccord Genuity.
What’s more, higher share prices have driven down dividend yields to 3.6 per cent on average. That’s below the average dividend yield of 4 per cent over the past five years, and implies that a lot of good news is already reflected in bank stocks.
First-quarter financial results may help answer the question of whether the loftier share prices are justified.
One area to keep an eye on is loan growth, as the economy continues to heal.
Darko Mihelic, an analyst at RBC Dominion Securities, expects overall loan growth of 6.4 per cent, compared with the fiscal first quarter of 2021, marking an acceleration from last quarter as mortgage activity remains solid, business loans pick up and consumers continue to spend.
“Although Omicron concerns and the return of some containment measures in January did reduce travel and restaurant spending, spending remained 10 per cent above pre-COVID (2019) levels in January,” Mr. Mihelic said in a note.
Fatter loan margins is another area to watch, even if the trend is only just emerging ahead of rate hikes.
Observers expect that the Bank of Canada and the U.S. Federal Reserve will start to raise their key interest rates starting next month, and bond yields have already surged in anticipation. This is good news for banks because they can lend money at higher rates, though some banks are more exposed to this upside than others.
“It is well understood that TD has the most earnings sensitivity to rising rates, but with the stock trading at the widest premium to the group it is already getting a lot of credit for that,” Meny Grauman, an analyst at Bank of Nova Scotia, said in a note.
He added: “In our view, there may be room for banks with less reported sensitivity to surprise to the upside on margins, depending on what we hear from management this earnings season.”
Lastly, the big banks may have something interesting to say about how rising inflation is digging into their expenses, tapping into one of the key market themes of this year.
Last quarter, the big banks suggested that their expenses would rise betwen 3 per cent and 4 per cent this year. But with the Canadian rate of inflation rising in January to a three-decade high of 5.1 per cent, at an annualized pace – and even higher in the United States, where some banks maintain large operations – this forecast may be out of date.
“We think mounting inflationary forces will likely push actual expense growth closer to the top end of that range and perhaps somewhat higher,” Mr. Holden said.
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David Berman