Another analyst covering Canadian banks predicts that many lenders will announce dividend increases when they report their earnings over the coming weeks.
Gabriel Deakin of the National Bank of Canada Financial Markets to Clients said in a report Sunday evening that he expects half of payments to increase in Canada’s Big Six: the Royal Bank of Canada, the Bank of Montreal and the National Bank. Of the two regional banks it covers, expect the Laurentian Bank of Canada to rise, while the Western Canadian Bank will stand idly by.
It’s a more modest view of the earnings increase compared to his counterpart John Aiken, who recently said he expects TD Bank Group to be the only lender not to join the “bonanza” to increase payments this earnings season.
As for results to be announced starting May 25, Dechaine has raised its earnings per share estimates for all six major banks (other than Bank of Nova Scotia) by one percent. His appreciation of Scotia rose by two percent. Deschain said his adjusted earnings estimates reflect higher interest rates by the Bank of Canada and the US Federal Reserve.
The Bank of Canada has raised its benchmark interest rate target twice so far this year, including a half-point increase to 1.0 per cent last month. The higher cost of borrowing affected the outlook for the Canadian housing market and led some economists to anticipate lower housing prices.
Dechen acknowledged that the expected slowdown in mortgages is a “key story” for banks. However, that is expected to be more evident later this year.
“We believe the decline will be more severe in the second half. Although the decline in mortgage volumes should have only a slight impact on bank yield growth, the narrative around this issue would not build positive sentiment,” he wrote in his report. .
Credit quality has been a focal point for banks since the start of the pandemic. When COVID-19 spread, they set aside billions of dollars in loans that could default. However, the tidal wave of defaults did not materialize, thus banks’ profits boosted in recent quarters as they released some of their provisions.
Deschain stated that he expects banks to “soften” their reversal of loan loss reserves to loan performance due to the “volatile macroeconomic/geopolitical background compounding recession fears”.
Here are some of the bank’s specific topics that Dechaine referred to in his report:
BMO: Dechaine said he expects a “strong” quarter for the bank’s US operations, based on a regulatory filing covering the first three months of 2022. (A reminder that Canadian banks will report results for their fiscal second quarter, which ended April 30. .)
Scotia: Dechin said he expects continued improvement in the bank’s international operations. “The question remains whether investors will be rewarded for this improvement in performance or will remain vigilant due to political risks in the region against the backdrop of a ‘risk-off’ mentality,” he wrote.
Canadian Imperial Bank of Commerce As a bank whose fortunes often correlate with the health of Canadian housing markets, CIBC has a lot at stake as higher interest rates dampen buying activity. “Although the housing market crash is cause for concern, we don’t know why this year’s version of anxiety will lead to a different outcome than any of the other periods of anxiety we’ve encountered over the past decade+,” he wrote. Deschamps, who said CIBC shares are on top of a “pass order” based on what he described as an “exaggerated” correction.
National: This is another Canadian bank stock that Dechaine said looks favorably on earnings, based on domestic lending activity. He noted that the National Capital Markets business may surprise to the upside due to the easy comparison on an annual basis with the second quarter of last fiscal year.
RBC: While Dechaine acknowledged that RBC’s capital markets unit faced headwinds last quarter, he said investors “should step in opportunistically” if its shares tumble due to the results. He cited RBC’s strong capital position as justification for the premium assessment.
TD: Dechaine cited several concerns for this bank ahead of its earnings, including the risks of a disappointing performance in its US banking operations. He also wondered if the market had fully accounted for the lower overdraft fees.
Bank earnings season begins May 25, when BMO and Scotia are due to report.