Canadian banks set for 1st-qtr profit growth, but costs, margins could deal blow – Metro US

Canadian banks set for 1st-qtr profit growth, but costs, margins could deal blow

FILE PHOTO: The financial district of Toronto
FILE PHOTO: The financial district of Toronto

TORONTO (Reuters) – Canadian banks are set to report higher first-quarter earnings from a year ago, thanks to low provisions for credit losses and improving loan demand, but rising costs are a focus area for investors.

Analysts expect Canada’s Big Six banks – Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada – to post an average 6% increase in adjusted earnings per share in the three months through January.

However, excluding the impact of provisions and taxes, earnings could be lower than a year earlier, with expense growth outpacing revenue expansion, and lower contribution from capital markets units following last year’s strength, CIBC Capital Markets analysts wrote in a recent note.

Royal Bank kicks off results reporting on Thursday.

Canadian banks have reported record profits throughout the pandemic, as strong mortgage lending, trading and deals activity helped offset an evaporation in demand for other kinds of credit. Now, with restrictions and accommodative government and central bank policies coming to an end, the drivers of earnings are also starting to shift.

“Mortgage growth will continue to be strong, no surprise there,” said Rob Colangelo, vice president and senior credit officer at Moody’s Investors Service. “But other kinds of lending, credit card, auto lending, there’s some return to growth there.”

Credit-loss provisions are also likely to keep trending lower, with the banks continuing to release capital they had set aside in anticipation of impaired loans that have not materialized, Colangelo said.

But expenses are among the biggest uncertainties for the quarter, particularly related to compensation, driven by a tight labour market.

“There’s a lot of movement, especially in the financial services sector, and a lot of it is driven by wages,” Philip Petursson, chief investment strategist at IG Wealth Management. “I’m curious as to how much of an impact this is having on the banks.”

The phenomenon is a global one, with major Wall Street banks raising pay and bonuses to attract and retain talent, particularly in investment banking units.

Surging inflation and planned business investments could also exacerbate cost pressures, even as revenues remain challenged during the quarter.

CIBC analysts predicted year-on-year revenue growth of just 1% in the first quarter, noting central bank interest rate hikes that could help have not happened yet.

“The natural offset to inflation is higher interest rates,” they wrote in a note. “Inflationary impacts are happening now and rate benefits are in the future.” The Bank of Canada is widely seen raising rates at its March 2 meeting.

A much-awaited improvement in net interest margins may also not have materialized during the quarter. Although fixed rates on mortgages have risen, they have done so at a slower pace than short-term rates, which determine banks’ borrowing costs and have risen in anticipation of central bank rate hikes.

With the Canadian banks index up 115% since its March 2020 trough, compared with an 89% gain in the Toronto stock benchmark, bank shares have more downside risks, Petursson said.

“If banks surprise to upside, I’m not as convinced we will see a significant jump up in stock performance,” he said. But if the earnings disappoint, “you could see a sharper hit to the downside.”

(Reporting By Nichola Saminather; Editing by Andrea Ricci)