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These three Canadian banks are poised to hike their dividends as earnings season gets underway

Concerns about the Canadian housing market have been weighing on bank stocks this year, and it’s likely that these concerns will be a focal point for investors as the big banks roll out their fiscal third-quarter results starting this week.

Royal Bank of Canada will kick things off on Wednesday morning, followed by Canadian Imperial Bank of Commerce on Thursday. Next week, Bank of Montreal, Bank of Nova Scotia and National Bank of Canada will report their respective results, with Toronto-Dominion Bank closing the reporting season on Aug. 30.

The outlook is upbeat, even as Canadian personal-debt levels have climbed to record highs and regulators have introduced new rules to dampen the housing market.

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Analysts expect earnings per share will rise about 9 per cent, year over year. And income-loving investors can look for dividend hikes from RBC, CIBC and Scotiabank.

Some of this optimism springs from recent interest-rate hikes by central banks. The U.S. Federal Reserve has raised its key rate twice this year, with another two rate hikes expected before the end of the year, while the Bank of Canada raised its key rate in July, marking the fourth hike in about a year.

Higher rates tend to expand profit margins on bank loans if the rates that banks pay on deposits remain relatively unchanged.

As Robert Sedran, an analyst at CIBC World Markets, explained in a note: “We are still at a point in the economic cycle where rate hikes benefit the banks.”

He added: “One day, these will become neutral and, eventually, negative, but there have been few warnings signs flashing to signal that those days are upon us.”

This is the area where investors will probably focus their attention, though. The good news: Recent trends point to ongoing expansion of lending activity, albeit at a slower pace.

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Based on Canadian regulatory data, RBC Dominion Securities analyst Darko Mihelic noted that domestic real estate-secured lending growth among large Canadian banks was 4.5 per cent in May, year over year, down from 6.1 per cent a year ago.

“We continue to assume mortgage growth for the large Canadian banks will slow to approximately 2 per cent (annualized) on average over our forecast period,” Mr. Mihelic said in a note.

But add in efficiency gains at the largest banks, which should pick up through the second half of the year, and he expects earnings from Canadian personal and commercial banking – the bulk of bank operations − in the fiscal third quarter will rise by an average of 6 per cent, year over year.

Add in stronger growth from the U.S. operations of BMO and TD, in particular, and Mr. Mihelic sees the banks reporting average overall earnings growth of 10 per cent, year over year, which is slightly better than the consensus.

Despite the upbeat outlook, and strong profit growth in previous quarters – earnings per share rose 13 per cent in the second quarter, year over year − bank stocks have been struggling throughout 2018. The S&P/TSX banks index is up 1.7 per cent this year.

“They have underperformed their own earnings growth so far this year, but we expect the earnings progress to be more closely reflected in the shares in coming months,” Mr. Sedran said in his note released last week.

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That will depend, though, on whether investors see the third-quarter financial results as an indication that things are still going well for the big banks or as a final hurrah before trouble emerges in the Canadian housing market.

Some analysts aren’t sure how investors will react.

Doug Young, an analyst at Desjardins, estimates that earnings will rise by 7 per cent on average.

“Not bad, right? But will the market care, or will the focus remain on the prospect of slower mortgage loan growth, highly indebted Canadian consumers, credit trends that one could argue probably can’t get any better, etc.?” Mr. Young said.

Investors will soon get an answer.

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