Investors in major Canadian banks will be looking for signs of loan growth, the impacts of the Delta variant, and clues about what the Big Six might do with their cash reserves when they release their report this week.
Banks are generally expected to unwind more of the record amounts they set aside last year – at least $ 16.5 billion in the Big Six – to cover widespread defaults that do not occur. are never materialized.
Shareholders, however, have already largely taken into account the increase in profits due to the reduction in reserves, as was already seen in US bank profits last month, said James Shanahan, senior research analyst at shares for North American finances at Edward Jones.
“In some cases, there were profit beats of 10, 20, 30 percent, and stocks were down. So it is clear that the market will not reward Canadian banks if they generate huge gains and it is simply linked to the release of reserves. “
Loan growth will be a key area to watch as the economy reopens. Many people and businesses used extra cash during the pandemic to pay off debts, putting pressure on a key area for the financial industry.
However, Canadian bank lending has not been as badly hit by lending as the United States, largely thanks to residential mortgages which make up about two-thirds of Canadian bank loan portfolios, Shanahan said.
Mortgage activity has been buoyant in Canada this year, with home sales and prices skyrocketing, which has benefited banks but also heightened concerns about household debt.
The Bank of Canada said in a financial review in May that high household debt and housing market imbalances have both intensified over the past year.
“The housing market boom and the corresponding increase in mortgage debt support economic growth in the short term, but increase the risk to the Canadian economy and financial system over the medium term.
Debt levels also prompted Fitch Ratings Inc. in July to downgrade its rating on the operating environment of Canadian banks to reflect “the high levels of private and public sector debt, which Fitch considers as negative for long-term credit conditions and business volumes. . “
Nigel D’Souza, financial services investment analyst at Veritas Investment Research, said that overall debt levels are a potential concern, but the monthly postage for that debt is the most important factor.
“It’s a potential risk, but until interest rates start to rise and the cost of servicing those debts starts to rise, I don’t think it will translate into credit risk. “
The most immediate headwind for banks could be a slowdown in activity on the capital markets front, D’Souza said. Banks have seen their trading revenues increase, along with underwriting and advisory fees, as more companies raise funds and make public offerings in what has been high market activity in general.
Capital markets income could fall seven percent quarter over quarter, estimates CIBC analyst Paul Holden, which will help push overall earnings per share down by an estimated average of 2, 5 percent from the previous quarter.
“Trading volumes for stocks, derivatives and fixed income all indicate a decline in trading income,” Holden said in a note.
Looking ahead, the other big unknown for banks is the issue of dividend increases and share buybacks, which were banned by Canada’s banking regulator last year when the economic impacts of the pandemic failed. were unclear.
Those restrictions are still in place, but analysts expect them to be lifted in late October, when the Office of the Superintendent of Financial Institutions announced it would adjust the amount of capital banks are required to hold.
Like so many others in the financial perspective, delays in reopenings due to the Delta variant could push back the dividend schedule.
With so much uncertainty in the transition, investors can be somewhat cautious in their reaction to earnings for the quarter, much like they have been with US earnings, Shanahan said.
“The overall reaction to the earnings of the major US banks has been muted, and I would expect it to be.”
Scotiabank and Bank of Montreal report Tuesday, followed by National Bank and Royal Bank on Wednesday and CIBC and TD Bank on Thursday.
Ian Bickis, The Canadian Press