What to expect from Q4 round of bank earnings
The recent outperformance of bank stocks versus the broader Canadian equity market suggests investors expect another good year for the sector in 2018. While some may be looking beyond the upcoming round of fourth-quarter results that kicks off with Scotiabank on Tuesday, there is still plenty investors should be keeping an eye on.
Each of the Canadian banks has reported positive earnings per share surprises in the past 11 quarters, so expect more of the same this time around. The average EPS upside surprise has ranged from 1.8 per cent to 5.5 per cent, with Bank of Montreal and CIBC topping the list during that almost three-year period. Toronto-Dominion Bank and National Bank of Canada led the way at nine per cent and four per cent, respectively, in the two most recent quarters.
Scott Chan, an analyst at Canaccord Genuity, noted that this is consistent with shares of both TD and National outpacing their peers in 2017. He believes further EPS surprises could come from things like better-than-expected cost controls, the benign credit environment, and strong capital markets or wealth management results.
“Based on Q3 results, the market tends to reward high quality earnings, and EPS surprises,” Chan said.
The analyst anticipates above consensus EPS from Scotiabank, National and TD in Q4, and below consensus results for BMO, CIBC and Royal Bank of Canada.
“All signs point to a positive start to the year, with Canadian housing still a focus,” he added. “Management outlook and guidance into 2018 will be important.”
Before looking ahead, however, there is the potential for some Q4 surprises. The final quarter of the fiscal year is often used as a clean-up period when restructuring charges are taken, or expenses creep higher. That’s partly when Robert Sedran at CIBC World Markets anticipates a rather lacklustre set of results.
“The mediocrity stems from the weakest capital markets environment of the year, the expectation of seasonally elevated expenses, and assorted one-off items that seem to find their way into Q4,” the analyst said.
His forecast for an average quarter-over-quarter EPS decline of four per cent, implies still-decent year-over-year growth of about five per cent.
“We do not envision being particularly fussed about results this quarter — good or bad — since the focus should be on the longerterm implications of the numbers, where we remain constructive,” Sedran said. “Regardless of what is reported, this was a good year for the banks.”
He also thinks weakness in capital markets revenues will likely more than offset gains from higher net interest margins for the bigger banks.
As for dividends, the analyst noted that BMO, National and Laurentian Bank are due for increases based on their every-other-quarter raise pattern.
Despite softer trading in Q4, BMO Capital Markets analyst Sohrab Movahedi noted that firmer M&A activity should help the capital markets results for the banking sector. Similarly, their wealth management and insurance segments should get a lift from stronger equity market valuations, but a headwind from weather-related insurance claims. Together, he thinks that will produce related earnings that are largely in line with a year ago.
“Business diversification will once again pay dividends,” Movahedi said, highlighting an expected seven-per-cent gain in Canadian banking for the group, and a 23 per cent year-over-year improvement in U.S. and international banking results.
Economic conditions in Canada are in pretty good shape, particularly when it comes to the labour market, and that points to further optimism in terms of loan losses for the banking sector. After two interest rate hikes from the Bank of Canada in the past four months, the market is anticipating more in 2018.
With that backdrop in mind, and considering the economy appears to be at the mid to late part of the cycle, analysts generally view this as a period that supports a positive risk profile for bank stocks. That’s helped Canadian names not only outperform the S&P/TSX Composite index, but also a group of approximately 40 global banks by more than 250 basis points.
“This relative outperformance is likely due to the dissipating concerns associated with the alternative mortgage market, stable to improving oil prices, and a generally favourable macroeconomic backdrop for Canada,” Movahedi said.
All signs point to a positive start to the year, with Canadian housing still a focus. Management outlook and guidance into 2018 will be important.