Oil losses may catch up with banks

Though there’s some debate whether financial institutions will have worst year since ’08

Investors in Canada’s biggest banks will get a closer look this week at how well they are managing the impact of low oil prices, high household debt loads and the competitive threat from new technologies, such as Apple Pay.

The country’s largest banks release their fourth-quarter results, starting Tuesday with Bank of Nova Scotia and Bank of Montreal, wrapping up what has been a challenging year for the sector.

Some analysts are predicting this will be the quarter the banks will finally see the effect of a yearlong rout in oil prices.

“Canadian banks are on track for their worst performance since 2008,” Jason Bilodeau, analyst at Macquarie Research, wrote in a recent note.

“We maintain our guarded view as we roll into 2016,” Bilodeau added, citing the ongoing effect of low energy prices, a stretched and unstable housing market, muted economic growth and emerging challenges from technology disrupters.

Other analysts are forecasting Canada’s banks will avoid the worst of the fallout from the energy sector.

“If it’s supposed to be a Category 5 hurricane, why is it sunny outside?” Robert Sedran, an analyst at Canadian Imperial Bank of Commerce (CIBC), asked in a research note.

“Much of the discussion all year has been around when that particular storm will make landfall. We do not believe this is the quarter.”

Sedran cites resilience in the Canadian job market and also in consumer credit.

Royal Bank of Canada analyst Darko Mihelic said he was not expecting to see a “credit shock” in the fourth quarter. However, given weakness in investment banking and a lot of “noise” about expenses, he also believes the quarter will not bring the “a-ha” moment that would alter his “sit-and-wait” view of the sector.

“Heading into 2016, we believe the earnings environment for the Canadian banks continues to be difficult,” analyst John Aiken, at Barclays Capital, wrote in a recent report.

Analysts will be watching for updates in a number of areas.

That includes the banks’ exposure to loans in Canada’s troubled energy sector, where plunging global prices for crude oil have led to massive cuts in capital spending plans and jobs.

Consumer loans are also a concern in Alberta as the province’s problems in the oilpatch spread to other sectors, such as home prices.

“The increased emphasis on expense control will reach a crescendo in the upcoming Q4 results,” Scotiabank analyst Sumit Malhotra wrote in a recent research note. He estimates the banks have taken a total of $1.3 billion in restructuring costs over the past five quarters. With expense growth outpacing revenue growth for much of 2015, more cuts could be coming, he noted.

Scotiabank announced on Oct. 24, a week before the quarter ended, that it will cut jobs and consolidate regional centres into two technology hubs in Toronto over the next two years.

TD Bank and National Bank have also previously announced they will be cutting hundreds of jobs, while CIBC and Bank of Montreal have announced restructuring, usually a sign that job cuts are coming.

CIBC has already announced it plans to record a $200-million restructuring charge in the fourth quarter.

Banks have traditionally cut their workforces — their biggest expense — during times of economic instability. But investors are not seeing the full benefits as the banks beef up spending in other areas to fend off their new financial technology rivals, Google and Apple

Both Scotiabank and TD Bank have recently announced they are opening new high-tech incubators that will create hundreds of jobs.

Apple Pay entered the Canadian market on Nov. 17, after the quarter closed.

For now, the high-profile service is limited to American Express customers, who account for just 5 per cent of all credit card transactions in Canada.