Banks expected to report strong quarter
Housing stabilizing, interest rates higher
TORONTO — Canada’s biggest banks are expected to report yet another strong quarter as the country’s housing market shows signs of stability and rising interest rates add to their bottom line.
Royal Bank of Canada is the first lender to report its fiscal third-quarter results on Wednesday, and most analysts are expecting “solid” growth across the industry, with estimates of earnings-per-share growth as high as 10 per cent year-over-year.
“We believe the earnings environment sets up well for a strong second half ... With the Canadian housing market behaving itself, investors can turn their attention away from that and towards earnings, which have been supported by (profit) margin expansion, operating leverage, and growth in the expansion segments,” Robert Sedran, an analyst with CIBC Capital Markets, said in a research note.
Canadian Imperial Bank of Commerce will be the next to report its earnings for the threemonth period on Thursday, followed by Bank of Nova Scotia and Bank of Montreal on Aug. 28, National Bank of Canada on Aug. 29 and Toronto Dominion Bank on Aug. 30.
One factor looming over the banks’ earnings for most of the fiscal year has been housing activity and mortgage originations after tighter lending guidelines were introduced at the beginning of the year.
National home sales in July were down 1.3 per cent compared to a year earlier, smaller than the double-digit declines seen in previous months. The Canadian Real Estate Association said that the new stress test for uninsured mortgages “continues to weigh on home sales, but its effect may be starting to fade slightly in Toronto and nearby markets.”
Some analysts say they expect banks’ earnings performance to be driven in part by improvements in housing market stability, particularly in the Greater Toronto Area, but others are advising caution.
Most Canadian lenders got a bump from a spike in mortgage origination at the end of the calendar year as homebuyers rushed to lock in home loans before the new rules took effect on Jan. 1.
“As this phenomenon fades, we are expecting to see a sharp dropoff in origination volumes in the second half,” said Gabriel Dechaine, an analyst with National Bank of Canada. Dechaine estimates that for banks to fall in line with their forecast of a five per cent drop in uninsured mortgage origination volumes, originations will need to fall by 20 per cent in the second half, he said in a research note.
Still, Canada’s Big Six banks and Quebec’s Desjardins Group have built up a capital buffer and are better prepared for a housing crisis at home than they were in 2016, Moody’s Investor Service said in a recent report.
Plus, economic fundamentals and a rising interest rate environment on both sides of the border may be poised to offset the impact of slowing mortgage lending growth.
During the quarter ended July 31, these lenders were already benefiting from growing net interest margins — or the profit made on loans — as interest rates rose on both sides of the border in previous months. Net interest margins are the difference between the money banks earn on the loans they make and the interest they pay out to savers.
In July, the Bank of Canada hiked its trend-setting interest rate for the fourth time in a year to bring the benchmark from 1.25 to 1.5 per cent, further bulking up those profit margins.
Last quarter, Royal Bank of Canada’s chief financial officer, Rod Bolger, said that even if the lender’s mortgage growth halves, the impact would be offset by the benefit of one central bank rate hike.
The country’s recent string of strong economic data raises the likelihood of another potential rate hike in October.