The two themes that have defined the big banks' financial results in recent quarters – slowing profit growth and rising provisions to cover bad loans to the energy sector – will likely be on full display this week as the banks roll out their second-quarter results.
Analysts estimate that profits among the Big Six banks will rise an anemic 1 per cent from last year and decline by 2 per cent from the previous quarter, due to sluggish lending, continuing low interest rates, and weak mergers and acquisitions activity.
"Ultimately, we have arrived at the conclusion that banks are essentially the new utilities," Peter Routledge, an analyst at National Bank Financial, said in an note. "They provide investors with relatively safe dividends and a healthy yield but slow earnings growth."
Nonetheless, expect some drama over the banks' exposure to the energy sector – a simmering topic that gained new urgency after Canadian Western Bank and National Bank of Canada earlier this month set aside surprisingly large provisions to cover bad loans to struggling oil and gas companies – even as the price of crude oil has rebounded to above $45 (U.S.) a barrel.
"Although oil prices are well off their recent lows, there are growing indications that the recent rally is doing very little to improve the credit outlook for many oil producers," Meny Grauman, an analyst at Cormark Securities, said in a note.
Last week, for example, Penn West Petroleum Ltd. said it was struggling to meet its debt obligations, warning that it may have to seek new terms for the $500-million it owes to banks.
Mr. Grauman, like most observers, believes that bank exposure to the energy sector is manageable, given that loans to oil and gas companies account for just 2.2 per cent of total bank loans.
Even so, absolute losses can add up to the point where they inflict considerable pain on the banks. National Bank's provisions for credit losses, at $250-million, are expected to cut its second-quarter profit in half.
"We continue to emphasize that even at these low levels [of loan-loss provisions], it will be enough to effectively wipe out average earnings growth in fiscal 2016 and limit earnings growth in fiscal 2017," Mr. Grauman said.
Darko Mihelic, an analyst at RBC Dominion Securities, estimates that the Big Six banks in the second quarter will set aside more than $1.9-billion to cover bad loans, up 20 per cent from the previous quarter.
"Some indicators we track suggest that credit quality may have weakened for the Canadian banks in the second quarter and we continue to believe that we are still early in the rising part of the credit-loss cycle," Mr. Mihelic said in a note.
He expects that provisions for bad business loans in particular, a category that would include loans to oil and gas companies, will surge 170 per cent from the previous quarter, to a total of more than $600-million.
The challenge from the depressed energy sector comes at a time when Canadian banks are also cutting expenses to meet slowing revenue growth, and redirecting resources from traditional banking toward online and mobile banking – leading to job cuts and large restructuring charges.
Bank of Nova Scotia announced earlier this month that it would take a charge of about $375-million, before taxes, in the second quarter as part of its "strategic efforts." Its quarterly results should indicate the extent to which these efforts have led to layoffs.
The second-quarter reporting season kicks off on Wednesday, with Bank of Montreal's results, followed by a flurry of results on Thursday from Royal Bank of Canada, Toronto-Dominion Bank and Canadian Imperial Bank of Commerce.
Scotiabank and National Bank end the season next week.