TORONTO – From the woulda-coulda-shoulda file: Royal Bank stock(TSX:RY) was on sale in late February for less than $26, and the other Canadian banks were similarly discounted.
Shares in the Royal, Canada’s biggest bank, closed Friday at $42.25, still off from over $50 last September but up by 65 per cent from the grim days of late winter.
The Big Five as a group have staged a dramatic revival: gains since early March range from close to 50 per cent for Toronto-Dominion (TSX:TD), Canadian Imperial Bank of Commerce (TSX:CM) and Scotiabank (TSX:BNS) to almost 70 per cent for Bank of Montreal (TSX:BMO).
Most analysts don’t see this being seriously dented when the banks roll out quarterly reports this week, with a caveat that bank profits are closely linked to general prosperity.
Earnings per share are expected to be down from a year ago – by perhaps eight to 20 per cent overall, analysts project – because of slower revenue growth and higher loan-loss provisions in a dreary economy.
“Green shoots aside, GDP continues to be negative with negative implications for PCLs (provisions for credit losses) and loan growth,” commented UBS Securities analyst Peter Rozenberg.
“While loan pricing is increasing and funding costs have reduced, low interest rates are hurting margins.”
On the positive side, Rozenberg added, the outlook for capital markets has improved due to increased market consolidation, wider trading spreads, and improved financial markets.
BMO reports Tuesday on the February-April period, the second quarter of the banking year, followed Thursday by Scotiabank, CIBC, TD, and No. 6 National Bank of Canada. The Royal reports Friday.
“We expect second-quarter operating earnings to decline eight per cent year-over-year due to an expected doubling of loan-loss provisions and lower retail net interest margin, partially offset by a substantial improvement in the wholesale net interest margin and the depreciation of the Canadian dollar,” reported Kevin Choquette of Scotia Capital.
He sees the industry’s second-quarter operating return on equity at a solid 16 per cent, with no more than “modest” mark-to-market losses on assets.
Choquette adds that investors are shifting away from worries about capital solidity and focusing on profit power, and “we expect bank price-earnings multiples to expand significantly in the next few years” – implying substantially higher stock prices.
On the other hand, James Bantis of Credit Suisse argues that it’s “time to sell into strength.” He sees “considerable risk to the downside” – perhaps a 20 to 30 per cent share-price pullback for the group.
“We believe the severity of the economic slowdown in Canada is still in early days and the earnings challenges remain ahead, not behind, the banking sector.”
In the near term, the banks are constrained by the economy: the latest data from Statistics Canada show unemployment at eight per cent, up from 6.1 per cent a year ago, with overall economic activity down 2.3 per cent year-over-year.
Bantis adds that the Canadian banks are heavily influenced by problems in the United States, and “negative news flow on North American credit and economic trends are likely to continue.”
At UBS, Rozenberg forecasts a 20 per cent decline in second-quarter earnings per share, adding that following the group’s 60 per cent share-price rebound, “valuations appear closer to neutral.
He notes that the sharp rise in joblessness has negative implications for home mortgages and personal loans. However, Rozenberg adds that residential mortgages – 35 per cent of all loans in Canada – tend to be low-risk, and the main threat to bank profits comes from business lending, representing 40 per cent of total loans.
He also says reduced expenses could provide an offset to lower revenues, as the banks “more aggressively manage their costs down”.
Bank of Canada data released Friday showed chartered-bank loans down amid the slack economy – except in consumer credit.
Residential mortgages averaged $437.7 billion in April, off three per cent from January and down 6.25 per cent from April of last year.
Loans to Canadian businesses slumped 19 per cent from a year earlier to just under $82 billion.
But personal lines of credit expanded to $181 billion, an increase of 4.7 per cent for the quarter and up 20.4 per cent from a year earlier. And last month’s personal-loan total of $48.5 billion edged up 1.7 per cent from January and grew 8.1 per cent year-over-year.
Volatile credit-card receivables of $51.5 billion were 8.9 per cent higher than a year earlier.