Already-grey estimates on Big Six banks' performance 'hard to swallow' in current landscape, he says
Canada is already bracing to see its biggest banks report lower-than-average earnings per share in 2023, but one expert says these expectations are not low enough.
Paul Holden, CIBC Capital Markets analyst, wrote that there was a ‘high probability’ that consensus estimates – which previously matched banks’ guidance – would have to step down a few notches, and that CIBC Capital Markets was taking a ‘more conservative stance’ on its assumptions for the coming year.
CIBC’s EPS prediction sat at a gloomy 1.5%, 70 basis points below Bay Street analysts’ predicted average EPS growth for Canadian banks.
While the Big Six saw an average year of credit provisions waiting ahead of them, Holden found this forecast ‘hard to swallow’ given recent drastic changes in borrowing rates, inflationary pressures, and general economic slump. He wrote as much in a note to his clients on Wednesday, BNN Bloomberg reported.
Canadian banks’ performance this year would be determined by loan loss provisions, Holden said, and the Toronto-Dominion Bank and Bank of Nova Scotia were some of the most sensitive to downgrades in loan loss forecasts.
The analyst expected residential mortgage growth to run in line with banks’ guidance, while commercial loan growth projections would dip. Bank of Montreal and Scotiabank were Holden’s bets for most sensitive to a slowdown.
Holden also said that analysts’ EPS predictions should take into consideration Canadian banks’ varying net-interest-margin sensitivities, noting the considerable difference in net interest margins reported among Canadian banks over the final two quarters of 2022.
While net interest margin – the difference between income on interest raked in by a bank and the amount of interest it was required to disburse to its lenders based on their assets – has led most to assume that banks benefit from higher short-term rates, Holden said this wasn’t always the case.
Banks would inevitably profit from higher interest rates over time, but Holden said that the speed with which this would reflect in a bank’s earnings per share differed depending on each bank’s asset duration.
He expected banks’ net interest margins to continue to diverge in 2023, explaining that every two basis-point change in net interest margin impacted earnings per share by 1.5%.
The banks he believed were most vulnerable to net interest margin impact were Scotiabank, TD Bank, and Bank of Montreal, BNN Bloomberg reported.
