What to expect from Canadian banks in Q2 earnings season
Investors can expect some modest dividend hikes from Canadian banks when they begin reporting second-quarter results next week, but limited prospects for significant earnings growth means there isn’t much to get excited about.
Low oil prices and the impact on the Canadian economy continue to dominate sentiment in the sector, as they dictate much of the direction of the domestic credit cycle.
These issues are worthy of attention, but Canaccord Genuity analyst Gabriel Dechaine thinks they will be a “nonevent” from a credit perspective in Q2.
That’s because the unemployment rate has remained stable, which suggests consumer credit quality won’t deteriorate, and guidance for commercial and corporate loan losses hasn’t weakened. HSBC’s generally positive Q1 results are also worth considering.
“While banks booking sectoral allowances due to weakness in the energy sector is plausible, history suggests that this behaviour tends to be more reactive than one would imagine,” Dechaine told clients.
The analyst is pretty optimistic about credit loss provisions, but he is far less so about margins. Net interest margins compressed slightly in Q1 for the Canadian personal and commercial banking segment, and guidance points to more of the same for the rest of 2015.
The concern isn’t so much about the Bank of Canada’s surprise rate cut, which most Canadian banks labelled “manageable.” Rather, it’s the absolute low level of interest rates and more intense competition that has Dechaine and some investors worried.
Nonetheless, this cautious sentiment toward the banking sector means any positive trends could spark a rally. Even a “non-event” credit-quality quarter could do the trick.
Surprise dividend hikes would also please investors. But Dechaine isn’t expecting any, noting that only Bank of Montreal and National Bank of Canada are expected to raise their quarterly payouts by an average of three per cent. They are the first banks to report earnings, with results due on May 27.