Heading into quarterly bank earnings season last week, one of the big questions on investors' minds was how consumer lending would fare, given the debate over household debt levels in Canada.
Mortgages and credit card spending have fuelled bank profits for years. But Canadians have been bombarded with messages from Ottawa lately that household debt has risen to record levels.
Has the message sunk in? Possibly. When Bank of Montreal introduced unusually low mortgage rates at the end of the first quarter, forcing other banks to match, the limited-time offer had the all the earmarks of a move aimed at bolstering the books following a tough few months of sales. Anecdotally, several banks say they noticed a surge in activity, but won't know the final impact of the mortgage spree until later.
What is known, however, is that the Canadian consumer and business lending businesses at some banks have fared better than expected in the first quarter. Royal Bank of Canada and Toronto-Dominion Bank both reported profit increases in those divisions last week, even though Bank of Montreal still slumped compared to last year.
The performance of the Canadian lending operations wasn't enough to overcome a slowdown in capital markets profits for the banks who have reported so far, but it has been a bright spot. With the final two of the Big Five banks reporting this week, here is what analysts and investors are watching for.
Tuesday: Bank of Nova Scotia
The focus on Scotiabank's earnings will be on the picture at home and abroad. Canada's most international bank faces similar trends in several of the places it operates, from Canada to Mexico and South America, where low interest rates have tightened margins.
Analysts have been watching closely to see how effectively Scotiabank is managing costs in order to keep slim margins from eating into profits. Expect a lot of attention on the expense line of Scotiabank's books this quarter.
"Investors will be focused on expense efficiency, which was disappointing in the prior quarter," Brad Smith, an analyst with Stonecap Securities, said in a research note. "Success in this regard, coupled with positive revenue momentum in both the international and domestic banking segments, will be well received."
Thursday: Canadian Imperial Bank of Commerce
The threat of slowing loan growth in Canada is a key issue for CIBC, since it has a larger proportion of personal and commercial loans to total bank loans than several of its peers.
That means CIBC, Canada's fifth-largest bank by assets, is more exposed to fluctuations in the consumer lending market.
"The concern that the Canadian consumer is over-leveraged is not one we are ignoring in our forecasts," Canaccord Genuity analyst Mario Mendonca said in a research note previewing first-quarter earnings for the sector.
Mr. Mendonca estimates loan growth will slow across the industry in the coming year, but he doesn't expect it to stall. Further, he believes a slowdown doesn't mean a spike in credit losses for the banks, since debt-service levels in Canada appear stable. Given CIBC's large credit card and mortgage portfolio, analysts will pay close attention to its credit losses this quarter.