Strong outlook for Canadian banks
BANK EARNINGS FORECAST BRIGHT BUT HOUSING, NAFTA CLOUD OUTLOOK
The forecast for Canada’s biggest banks is bright thanks to U.S. tax reform and higher interest rates, but as they report first-quarter results this week, domestic mortgage demand and the North American Free Trade Agreement could cloud the long-term outlook, analysts say.
Earnings estimates for the 2018 fiscal year are being revised upwards by some analysts to account for the impending bump from recent interest rate hikes and a U.S. corporate tax cut from 35 per cent to 21 per cent that took effect on Jan. 1.
CIBC World Markets analyst Robert Sedran lifted the assumed average growth rate for the sector in fiscal 2018 from seven per cent to nine per cent, “turning what was already expected to be a good year into a better one.”
However, analysts say the impact of stricter rules surrounding uninsured mortgages as of Jan. 1 and tumultuous NAFTA negotiations will weigh on the Big Five banks.
“We believe short-term gains could fade shortly after earnings season as ‘the usual’ sector overhangs weigh on H1/18 performance, namely the housing market and NAFTA,” National Bank of Canada Financial Markets analyst Gabriel Dechaine told clients in a research note. “In other words: be nimble.”
The Canadian Imperial Bank of Commerce starts off the latest round of earnings for the quarter ended Jan. 31 on Thursday, followed by Royal Bank of Canada on Friday. The Bank of Montreal and the Bank of Nova Scotia both report their fiscal first-quarter earnings on Feb. 27, while TorontoDominion Bank reports its earnings on March 1.
Last quarter, Canada’s five biggest banks earned more than $10 billion in collective profits on the surprising strength of the domestic economy. For fiscal 2017 as a whole, each of the five biggest Canadian lenders reported record annual profits for a collective total of $40.3 billion in net income, up nearly 13 per cent from a year earlier.
“While Canada’s GDP is expected to ebb, we maintain that the broad-based strength suggests that the economic growth will continue to stay in positive territory, and by extension, bode well for the banks’ operating environment,” said John Aiken, an analyst with Barclays in Toronto, in a note to clients.