Big Six banks likely to report Q2 earnings that are similar to the previous year, according to experts
Increased expenses and loan-loss reserves, as well as weaker investment banking revenues, are likely to overshadow robust loan growth and margin expansion from rising interest rates, leading experts to expect a 12% dip in second-quarter profitability for Canada's top six banks.
According to Reuters, investors predict rising inflation and a stock market sell-off to put downward pressure on earnings, while the slowing housing market in Canada is projected to impact on banks' key growth engine more in the second half of the year.
The earnings reports for Bank of Nova Scotia and Bank of Montreal for the three months ending in April will be released on Wednesday, kicking off the reporting season for Canada's largest lenders.
Earnings from the other members of the Big Six – Royal Bank of Canada, Toronto-Dominion Bank, Canadian Imperial Bank of Commerce, and National Bank of Canada – are expected to be minimally changed from the previous year.
While historically low interest rates harmed net interest margins during the coronavirus outbreak, they stimulated mortgage demand. Meanwhile, capital markets and wealth management divisions were fueled by strong equities markets and deal activity. Loan losses were also kept minimal thanks to government stimulus measures.
But those tailwinds are giving way to challenges.
"You have a combination of falling equity markets and rising interest rates," which would have weighed on assets under management, with investment banking activity also slowing "dramatically" from last year, Steve Belisle, a portfolio manager at Manulife Investment Management, told Reuters.
The tight labour market presents another challenge. Given recent announcements of salary raises and bonuses, National Bank Financial (NBF) analysts warned in a note this week that banks may struggle to keep the growth in costs within the low-single-digit range that they have targeted.
Although better lending margins from increased interest rates benefit banks and other financial organizations, an index tracking bank stocks has lost 9% since the Bank of Canada's first rate hike in March, compared to a 3.9% fall for the broader benchmark.
"In a normal environment, we'd view such underperformance as an amazing buying opportunity," NBF analysts said. However, factors like slower asset growth potential and the possibility of a recession outweigh the benefits of margin expansion resulting from higher rates, they said.
As mortgages roll over, much of the margin boost from the 75 basis point interest rate hikes during the quarter will arrive in the second half of the year and later, according to Belisle.
Purpose Investments' chief investment officer, Greg Taylor, expressed concern about the extent to which Canada's housing market may slump and its impact on banks.
"The banks being one of the areas that's closest to the consumer, there's the risk that they are going to start seeing some stumbles," he said.
