Big bank outlook appears hopeful
Housing market turmoil leaves little near-term risk, analysts say
With concerns over consumer debt and a potential housing bubble keeping a lid on big bank shares as the second-quarter earnings parade begins Wednesday, some see a buying opportunity in the declining valuations.
“The banks have experienced fairly dramatic weakness . . . largely stemming from spillover around the housing market generated by the drama surrounding Home Capital Group,” Barclays financial services analyst John Aiken wrote in a note to investors Monday. “We do not believe any near- or even medium-term concerns are warranted and view the decline as a now-compelling entry point.”
He also suggested that fears of a Home Capital contagion have been overblown. The Ontario Securities Commission alleged in late April that the leading alternative mortgage lender made “materially misleading statements about its subprime mortgage underwriting operations.” The company says the allegations are without merit.
Home Capital sustained a run on deposits after the accusation and warned that the failure of the business could have a knock-on effect since it would dry up mortgages for new Canadians and other borrowers deemed ineligible by the big banks. The company, however, says the
“We do not believe that (Home Capital Group’s) issues are shared with the banks.” JOHN AIKEN BARCLAYS ANALYST
rate of withdrawals from accounts used to fund mortgage loans has slowed.
“We do not believe that (Home Capital Group’s) issues are shared with the banks, nor do we see (Home Capital) as a systemic risk to the Canadian housing market,” Aiken wrote. “While Canada may still experience a bursting of a housing market bubble, we see little risk in the near term, given relative affordability, largely centred on the ongoing low interest rates and stable employment levels leading to little-to-no near-term credit risk.”
Adding that he doesn’t foresee material changes to credit conditions even for mortgage portfolios, Aiken upgraded his rating on the shares of four of the Big Six and one regional bank.
CIBC analyst Robert Sedran agreed that Home Capital’s issues can be contained.
“There may be a test for the housing market coming when the economy next enters recession, but the troubles faced by Home Capital Group are about Home Capital, not the housing market.”
Stresses in the mortgage industry along with claims of aggressive sales practices by some of the big banks — and moves by Ontario to curtail speculative residential real estate investment — have combined to pressure bank stocks. S&P/TSX Banks Index has declined nearly 8 per cent since February.
That’s despite the fact that earnings are expected to show robust fee income from trading activities, a decline in loan-loss provisions as oil prices strengthen and gains from increases in U.S. interest rates that boost net interest margins for Canadian banks.
The Bank of Montreal will report earnings Wednesday, followed by Royal Bank, TD Bank and CIBC on Thursday. Scotiabank will report May 30.
Analysts at the JMRD wealth management group at National Bank Financial forecast healthy earnings per share growth from the Big Six banks.
JMRD added that the banks’ earnings commentary “will hopefully address a variety of investor concerns, such as the importance of alternative lenders in the larger mortgage landscape, the impact of a potential failure of one of its participants, as well as the growth outlook for mortgages.”
For the banking sector to find broader support, JMRD said stocks need to become cheaper “and the market needs to see some resolution on the Home Capital situation.”