Canada’s banks will see solid profit growth

Analysts see relatively solid profit growth for Canada’s big banks in the first-quarter earnings season that kicks off with the CIBC on Thursday.

According to CIBC Capital Markets’ Robert Sedran, the top six lenders will report a 2-per-cent average gain in earnings per share over the previous quarter. He said that could be good enough to trigger dividend increases from Scotiabank, Royal Bank and TD.

“It is probably an exaggeration to suggest that the outlook for Canadian banks is all sunshine and lollipops, but we do believe that there is reason to be optimistic about bank results,” Cormark Securities analyst Meny Grauman added in a report to investors.

A big catalyst is the stabilization of oil prices in Canada and globally after a deep decline started in late 2014.

That, along with new pipeline approvals and expanded oilsands capital expenditures, means lending conditions in the energy sector are improving after loan losses reached an estimated $1.3 billion over the 15 months ended last Oct. 31.

Canadian oilfield activity is rising this year, but the industry is still “a long way away from healthy,” Bruce Edgelow, vice-president of strategic initiatives with ATB Financial, a lender owned by the Alberta government with heavy exposure to energy companies, told The Canadian Press.

“It looks like there are some green shoots, some of the traditional lenders are coming back into the space,” he said. “But it’s been spotty.” Analysts also cite prospects for stronger U.S. economic growth following promised corporate tax cuts and say increased government spending on infrastructure and stimulus on both sides of the border would be positive for the banks.

Sedran said the quarter ended Jan. 31 tends to be seasonally strong for reasons including heightened capital market activity that has been especially brisk since Republican Donald Trump won the U.S. presidential election on Nov. 8. Hopes for growth in bank earnings helped send shares of the group ahead by more than 37 per cent in Toronto since last February and 17 per cent since the election.

But the gains also bumped the big banks’ forward price-earnings ratio by 31 per cent, said TD Securities bank analyst Mario Mendonca.

And the growth in share value has come amid headwinds that could affect the banks, including sluggish GDP growth, slowing wage gains, steep consumer debt and the threat of a housing market correction.

Mendonca said the market is pricing in stronger growth than can be realistically expected in an environment of modest GDP expansion.

“Layered against a sluggish domestic economy underscored by prolonged low oil prices, export pressure and uncertain U.S. policies fuelling a more dovish bank of Canada stance, we believe that valuations for the banks are stretched,” Barclays analyst John Aiken said in a note to investors.