Wednesday, May 10, 2006

RBC CM Preview of Cdn Banks Q2 2006 Earnings

RBC Capital Markets, 10 May 2006

Cash EPS Growth Estimated Up 11% YoY The banks start reporting Q2 earnings during the 4th week of May. Our estimated growth is indicated highest at RY (expected to lead revenue growth and operating leverage), followed by TD (partially acquisition assisted, but now more adversely impacted by currency) and BNS (International divisional growth, but also negatively impacted by currency). We are not factoring for any unusual gains/losses/items this quarter.

Moderate Revenue Growth. We estimate 8% YoY revenue growth (5% excl. TD’s Banknorth acquisition), roughly in line with 7% growth recorded in Q1/06 (5% excluding Banknorth). We are not anticipating retail spread improvement, though higher business loan volumes should augment already-solid wealth and wholesale activity. Adverse currency translation is expected to play a bigger role in dampening revenue growth this quarter.

Credit Solid…But Watching More Closely Now. Our normalized loan loss provision estimates for the group are indicated up 20% QoQ and 35% YoY, purely on a return to more normal, run-rate levels rather than as a result of impaired loan developments that we expect to remain very low. We are looking for an increase in LLP/L&A to 0.29% versus 0.23% in Q1/06. In our view, 0.30-0.35% should be the cycle-neutral average. This level of credit provision remains very manageable with only moderate EPS impact at the current low levels. Two banks (RY and TD) had modest impaired loan increases last quarter – if this broadened to a trend, we believe the banks would be quite weak as investors have been lulled into a rather complacent attitude.

Overall, we recommend investors remain cautious on bank this earnings cycle – the sudden and we think sustained interest rate rise in quarter may alter the banks’ outlook/guidance on loan volume & spread.