After years of strong results from outside the country, Canada’s six largest banks are expected to report international growth is slowing amid trade wars and recession concerns. At home, the banks are expected to set aside more capital for bad loans, in part because of low energy prices.
Bank of Nova Scotia kicks off reporting fiscal 2019 financial results on Tuesday.
Over all, Canada’s banks are expected to turn in disappointing profit growth for this fiscal year, which ended on Oct. 31, and in the coming year. Analysts forecast earnings per share (EPS) for 2019 will increase by between 2 per cent and 5 per cent compared with the previous year. That’s well below the banks’ stated targets of 5 per cent to 10 per cent annual EPS growth.
Only one institution, National Bank of Canada, is likely to hit its EPS growth goals in the current fiscal year and 2020, according to analyst Sumit Malhotra at Scotiabank.
“We think the deceleration experienced in 2019 will have staying power,” Mr. Malhotra said in a report. “The ability to earn through a slower revenue growth environment through cost control and targeted capital deployment will act as the key differentiators.”
When Scotiabank reports, analysts will focus on the influence that a changing business landscape in Latin America will have on future results.
“Three current issues facing the bank are civil unrest in Chile, Mexico’s business climate and a political leadership vacuum in Peru, with these three countries combining to generate 22 per cent of the bank’s profits year-to-date,” said Gabriel Dechaine, who follows the sector for National Bank. “While we don’t expect these issues to be readily apparent in Scotiabank’s fourth-quarter results, any indications of an impact on the outlook would be of interest.”
Scotiabank is also expected to turn in relatively weak results from its capital markets operations, reflecting an industry-wide decline in revenues from trading and stock and bond underwriting. Across all the Canadian banks, profits from capital markets activity are expected to fall by 6 per cent, year over year.
Canada’s banks added $525-million to loan loss provisions through the first nine months of 2019.
“We believe this pace of additions will be maintained during upcoming fourth-quarter results, if not accelerated, reflecting ongoing challenges posed by global trade tensions, low oil prices, rising personal bankruptcy rates across Canada and weakening domestic GDP forecasts," National Bank’s Mr. Dechaine said.
Analysts highlighted the potential for an upward spike in problem loans to energy companies, including Canadian companies that are pushing governments to build new pipelines. There are also concerns over rising problem loans to farmers, who have lost access to markets such as China because of trade disputes.
Bank of Montreal is aggressively expanding its commercial loan business and Mr. Dechaine said, “We expect some scrutiny of credit performance in this portfolio, especially in the oil and gas and agricultural portfolios.”
There are bright spots in the outlook for Canada’s banks.
Three months ago, Bank of Montreal and Toronto-Dominion Bank surprised investors with financial results that included lower-than-expected profits from their U.S. operations. This was largely because of tighter margins between interest rates on loans and what the banks paid clients for deposits, as the U.S. Federal Reserve cut interest rates three times. Since then, the U.S. interest rate environment has improved for banks, and that could translate into better-than-anticipated results in 2020.
“The U.S. business backdrop remains supportive in terms of loan growth and credit quality,” said Mr. Dechaine. “If ever a U.S.-China trade deal emerges, we believe a coiled spring effect could emerge for U.S. banks.”
Bank of Montreal, National Bank and Laurentian Bank of Canada are expected to raise their common share dividends when they announce financial results, according to several analysts.
All of Canada’s banks are relatively flush with capital and analysts expect management teams will continue to devote cash to share buybacks rather than takeovers. Over the past 12 months, the banks repurchased $4.9-billion of their own stock. The last major acquisition in the sector played out 18 months ago, when Scotiabank acquired wealth manager MD Financial for $2.6-billion.
Scotiabank’s Mr. Malhotra said deal-making is expected to remain muted because of “increased consideration of acquisition risk at later stage in the economic cycle.”
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.