A Bay Street sign, the main street in the financial district is seen in Toronto, January 28, 2013.Mark Blinch / Reuters
Canada's biggest banks will start rolling out their second-quarter financial results this week, and investors are counting on executives to provide answers to a burning question: Is the country's mortgage market okay?
Since Home Capital Group Inc. experienced a run on its deposits last month – sending the alternative mortgage lender's share price sliding 65 per cent in a single day – observers have been concerned about the potential knock-on effects. Adding to the urgency is the fact that Home Capital's challenges have arisen at a time when regulators are busy introducing measures to cool the real estate market, particularly in the Greater Toronto Area.
Stock prices of the Big Six banks are reflecting some unease. Collectively, they have fallen an average of more than 8 per cent from recent highs. The sector is now lagging the broad S&P/TSX composite index year-to-date – an unusual divergence that is calling for a response.
"Our expectation is that during earnings calls, bank managements will point to differences between Home Capital's mortgage origination and funding structure, as well as the quality of the banks' portfolios, as points of distinction," Brian Klock, an analyst at Keefe, Bruyette & Woods, said in a note.
"The Canadian government has taken steps to cool off the housing market and we'll look for bank managements to provide colour on the steps they're taking to insulate their portfolios," Mr. Klock added.
Despite the uneasy backdrop, analysts are relatively upbeat about the quarter. For one thing, they expect that Bank of Montreal and National Bank of Canada will hike their dividends. For another, profits should rise solidly over last year's results. Darko Mihelic, an analyst at RBC Dominion Securities, expects profit will rise by an average of 6 per cent over the same period last year. Robert Sedran, an analyst at CIBC World Markets, expects profit will rise by an average of 8 per cent. Gabriel Dechaine, an analyst at National Bank Financial, expects profit growth of 14 per cent.
The results should reflect a trio of improvements. Banks stand to benefit from recent cost-cutting measures, margins on U.S. loans should expand with the two recent interest rate hikes by the Federal Reserve and credit conditions have been improving with the rebound in the price of crude oil since early last year.
These improvements should offset slower capital markets activity since last quarter, with debt and equity issuance volumes down, according to a report from RBC.
"While U.S. investment banks reported good investment banking results in their most recent quarter, we caution that we cannot necessarily infer good investment banking revenues for the Canadian banks based on historical experience," RBC's Mr. Mihelic said in a note.
But Home Capital, which neared failure last month before it secured a financial lifeline from a pension fund to offset fleeing deposits, will probably loom large in any discussions about financial results. While the lender specializes in non-prime loans, and therefore doesn't compete with the major banks, it remains unclear whether its challenges will affect other lenders.
If Home Capital were to sharply curtail or stop originating loans, possibly making home purchases and mortgage reneweals more difficult for some buyers, then home prices and broader mortgage lending could also take a hit.
But most analysts believe the worries are overstated: "There may be a test for the housing market coming when the economy next enters recession, but the troubles faced by Home Capital Group this year are about Home Capital, not the housing market," CIBC's Mr. Sedran said in a recent note.
Even so, hearing that from a bank CEO could go a long way toward relieving investor anxiety.
"From 30 per cent housing price appreciation in Toronto that resulted in regulatory action by the Province of Ontario to the ongoing Home Capital drama, there has been no shortage of market developments," National Bank's Mr. Dechaine said in a note.
He added: "Outlook commentary from the banks will hopefully address a variety of investor concerns."
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David Berman