Monday, May 22, 2006

Eyes on Bank Earnings

Canadian Press, Rita Trichur, 22 May 2006

Canada's six biggest banks are poised to deliver low double-digit earnings growth on a year-over-year basis when they report their second-quarter earnings over the next two weeks.

And while it is shaping up to be another quarter of solid results, analysts will be watching closely for any deterioration in credit quality and the performance of their capital markets divisions.

“We are looking for median core earnings-per-share growth of 12 per cent year-over-year, with Royal Bank of Canada at the head of the pack and Scotiabank at the end,” said Andre-Philippe Hardy of Merrill Lynch, noting stronger-than-expected capital markets activity is expected bolster profits.

“Sequentially, we expect a three per cent median core EPS (earnings per share) decline, with only Bank of Montreal's three per cent increase being positive.”

The second-quarter earnings season runs between May 24 and June 1, with Bank of Montreal kicking off the financial reports.

It will be followed by a double-header May 25, featuring TD Bank and National Bank of Canada.

Royal Bank will report May 26, with Scotiabank disclosing May 29, leaving CIBC to cap off the season on June 1.

Consensus analyst estimates for second-quarter earnings per share, according to Thomson Financial:

— BMO: $1.21, up 11 per cent from a year ago.
— TD: $1.13, up 13 per cent.
— National Bank: $1.20, up 11 per cent.
— Royal Bank: 82 cents, up 18 per cent.
— Scotiabank: 84 cents, up 10 per cent.
— CIBC: $1.56, up 10 per cent.

But the headline earnings tell just part of the story. Analysts say they will also be monitoring the financial results for higher provisions for credit losses, or PCLs, on residential mortgages, unsecured loans and credit cards in the banks' mainstay retail operations.

“Although interest rates are moving higher, employment in the Canadian economy remains so strong that it would be unreasonable to expect retail PCLs to have increased,” said Mario Mendonca, an analyst with Genuity Capital Markets.

There are two banks in particular that he'll be monitoring with respect to consumer credit quality — CIBC and Royal Bank.

CIBC is the country's largest credit-card operator and has a higher PCL ratio than its peers. Last quarter, its retail loan losses were “surprisingly low” and analysts are hopeful that trend will continue in the February-to-April period.

Royal Bank, meanwhile, has shown strong growth in both credit-card loans and unsecured lending.

“And if there are two areas where you might see a bit of a crack early on — if and when the credit environment softens — it would be in those two loan categories,” Mr. Mendonca said.

Tom Kersting, a financial services analyst with brokerage Edward Jones, said that while credit losses remain low, ultimately that trend will turn as credit quality returns to more normalized levels.

“I think it will probably happen sometime this year, likely in the second half,” he said.

Analysts are also forecasting healthy growth in trading revenues from capital markets activity.

“The year-over-year improvement in trading volumes was about 40 per cent on the TSX,” Mr. Mendonca said.

“All of the banks have good exposure to equity market trading revenues, so I would suspect that we're going to see equity market trading revenues look pretty good across the group.”