Banks set to report earnings slowdown
TORONTO Canadian banks this week are gearing up to report their slowest annual earnings growth since the global financial crisis, as analysts and investors brace for another challenging profit season due to tougher economic conditions.
Profit margins are being squeezed by factors such as falling revenues from capital market units and higher badloan provisions.
Analysts expect earnings per share (EPS) to grow at just three per cent to four per cent for fiscal 2019, according to a straw poll by Reuters. That would be the slowest growth rate since the fiscal 2009.
“Banks are facing a perfect storm with a confluence of headwinds,” said Brian Madden, portfolio manager at Goodreid Investment Counsel in Toronto, adding that lenders’ long-run aspirational EPS growth targets are nearly double their current levels.
There is downside risk to (banks’) share prices, given a challenging operating environment.
Loan books and margins should be under pressure in the near term, analysts said, as oil pipeline congestion weighs on the energy-reliant economy, record household debt curbs mortgage growth and global economic uncertainty keeps interest rates low.
That has weighed on bank stocks, with the Canadian banks index rising just 9.4 per cent over the past year, less than the 13-per-cent gain in the broader Toronto stock benchmark.
“There is downside risk to (banks’) share prices, given a challenging operating environment,” Credit Suisse analyst Mike Rizvanovic wrote in a note, adding that fiscal 2020 average EPS estimates have declined by more than four per cent since Jan. 1. Bank of Nova Scotia kicks off earnings reporting on Tuesday, with Canada’s remaining five major banks following next week. Credit Suisse expects a 26-percent rise in fourth-quarter loan-loss provisions for the sector from a year ago, driven by consumer insolvencies, which jumped 19 per cent in September, the largest hike since at least 2011.
Challenges also linger for banks’ beleaguered capital markets businesses, the only segment to deliver negative earnings growth with a 12-per -cent decline so far this year, according to National Bank of Canada.
Banks’ investments to expand their capital markets’ businesses, particularly in the U.S., have not yet generated revenues, Gabriel Dechaine, an analyst at National Bank of Canada, wrote in a note. “However, the cost of these strategies has definitely had an impact,” he added.
Barry Schwartz, chief investment officer at Baskin Asset Management, who expects earnings growth of between four per cent and six per cent in fiscal 2020, believes some of the concerns are overblown.
“Capital markets are extremely cyclical,” he said.