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Expect bank share prices to stagnate despite profits

Various buildings in downtown Toronto are from left CIBC; Bank of Montreal, 1 King West and Scotia Bank (brown building). in downtown Toronto on April 16 2014.

Fred Lum/Fred Lum/The Globe and Mail

Not even blockbuster profits are enough to excite Canadian bank investors any more, so anyone counting on a big boost to lenders' share prices from the next batch of quarterly earnings is likely to be disappointed.

Even though three of the Big Six banks reported record profits last quarter, and the country's two largest financial institutions posted profits of more than $2-billion each, bank stocks have been some of the S&P/TSX Composite Index's worst performers this year. The broad index is up 6.6 per cent since January, but the bank sub-index has climbed only 3 per cent over the same period.

Analysts see little potential for the latest round of quarterly earnings reports, which begin this week, to change investors' minds.

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"Our review of key operating and valuation trends leads us to believe that this set of results will not be the catalyst than breaks Canadian bank stocks out of the holding pattern they have followed for most of the year," Bank of Nova Scotia analyst Sumit Malhotra wrote in a note to clients.

After delivering a run of stellar profits, Canada's banks are entitled to wonder what it will take to elicit some sustained praise.

"When compared against results from the past periods in which the banks were growing more rapidly, mid-single-digit growth rates are indeed unspectacular," CIBC World Markets analyst Rob Sedran wrote in a note to clients, referencing the sector's new normal. "However, when compared with many developed-world banking systems where the large banks are struggling to show much progress at all, the results are spectacular."

Banks' wealth management arms are the most likely to lift profits. They have an enjoyed a solid run since 2013 as the S&P 500 gathered steam and are poised for even better things now that the TSX is making moves. Independent asset managers such as CI Financial Corp. and Gluskin Sheff + Associates Inc. recently posted extremely encouraging results that the banks' wealth management arms are expected to replicate.

In personal and commercial banking, all eyes will again be on domestic loan growth. The Bank of Canada says the pace of personal lending is slowing, leading some analysts to speculate that quarter-over-quarter growth could be less than 1 per cent.

However, business borrowing is expected to remain a bright spot. In addition, loan losses should continue to be negligible. "Especially with an economy that looks set to at least deliver in the next couple of years what it delivered in the last couple, we expect the lion to keep sleeping for now," Mr. Sedran wrote.

There is an unusual degree of uncertainty this quarter around capital markets revenues. Global banks have recently reported big drops in fixed-income trading revenues and this area may hamper the Canadian banks as well. However, dividends are much more predictable this quarter, with most analysts assuming that the likeliest candidates for payout hikes are the smaller banks.

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Because little is expected to change in Canada any time soon, foreign operations continue to dominate investing outlooks. "We continue to prefer banks with meaningful international businesses over the longer term to offset what remains a slower growth environment in Canada," Royal Bank of Canada analyst Darko Mihelic wrote in a note to clients.

But investors can't get too excited, because profit gains continue to materialize slowly in the United States.

"The U.S. household in aggregate has yet to put behind the enormous shock imposed on it by the financial crisis, a shock that continues to mute the propensity of U.S. households to borrow," National Bank of Canada analyst Peter Routledge noted.

Scheduled earnings reports from the major banks:

Thursday, May 22

Toronto-Dominion Bank,

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Royal Bank of Canada

Tuesday, May 27

Bank of Nova Scotia,

National Bank of Canada

Wednesday, May 28

Bank of Montreal

Thursday, May 29

Canadian Imperial Bank of Commerce

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More


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