25 November 2018

Analysts Offer Mixed Outlook on Big Six Q42018 Results

  
The Globe and Mail, David Berman, 25 November 2018

Canada’s biggest banks will report their fiscal fourth quarter results starting this week, and analysts are expecting a strong finish to the year. But given the stock market is dominated by concerns over slowing economic activity, will investors care?

Bank of Nova Scotia will kick off the reporting on Tuesday, followed by Royal Bank of Canada on Wednesday and Canadian Imperial Bank of Commerce and Toronto-Dominion Bank on Thursday.

Next week, Bank of Montreal and National Bank of Canada will report their results on Dec. 4 and 5, respectively, for the three-month period ended Oct. 31.

Analysts anticipate the Big Six banks will show profit growth of about 12 per cent, year-over-year, driven by their strong international operations, accelerating commercial loan growth and rising interest income. They also expect BMO and National Bank will raise their dividends.

“It has been a good year. Moreover, notwithstanding the share price performance in the last few months, commentary at recent conferences and investor days suggests that fiscal 2019 will be another good one,” Robert Sedran, an analyst at CIBC World Markets, said in a note.

But the quarterly results will arrive during an unsettled period for the stock market. Investors are focusing on the threat of trade tariffs, inflationary pressures and rising interest rates, which is causing wild swings by major indexes. In Canada, higher borrowing costs are weighing on the housing market, which is also adjusting to tighter lending regulations, and low oil prices are hitting the energy sector.

The S&P/TSX Composite Index is down 7.4 per cent this year. Although bank stocks are outperforming the broad index, ever-so-slightly, no one is cheering: The S&P/TSX Commercial Banks Index is down 6.9 per cent this year after taking a 9.5-per-cent nosedive since September.

Will fourth quarter results lift the mood? Analysts expect TD, BMO, RBC and CIBC will benefit from their U.S. divisions, where profits are being driven by recent tax cuts and strong economic activity, and they expect Scotiabank’s profits will get a lift from the bank’s recent acquisition in Chile.

Together, profits from the banks’ U.S. and international operations should rise 31 per cent over last year, according to Sohrab Movahedi, an analyst at BMO Nesbitt Burns.

But expectations for Canadian personal and commercial banking – the meat and potatoes of bank operations – are far more muted. Darko Mihelic, an analyst at RBC Dominion Securities, pegs fourth quarter P&C growth at 3 per cent, year-over-year.

“We maintain our view that Canadian consumer loan growth is likely to slow in an environment of slower GDP [gross domestic product] growth and rising interest rates given the relatively high level of consumer indebtedness," Mr. Mihelic said in a note. "We are of the view that this will ultimately lead to slower net interest income and total revenue growth over the next few years.”

Residential mortgage growth in Canada slowed to just 3 per cent at the end of September. That marks the slowest pace in decades, according to Gabriel Dechaine, an analyst at National Bank Financial. Strong commercial loan growth has been picking up the slack, but analysts are starting to wonder how long this particular engine can keep going.

“With the mortgage market slowing, it begs the question: How sustainable is the trend of double-digit commercial loan growth?” Mr. Dechaine said in a note.

Canada’s energy sector is also likely to emerge as a key theme. The price of Western Canadian Select crude, the heavy bitumen produced in the oil sands, has fallen 74 per cent since July, driving down energy stocks and raising concerns about the impact to the Canadian economy.

The last time oil fell sharply, between 2014 and 2016, bank stocks declined nearly 22 per cent over the same period amid concerns that struggling energy companies would have trouble meeting their debt obligations.

Perhaps bank stocks will perform better this time around. Valuations have fallen to 9.7-times estimated 2019 earnings – well below the 10-year average price-to-earnings ratio of 11.1, according to RBC Dominion Securities – which implies that bad news is already baked in.

As well, the Big Six emerged from the previous energy-fuelled downturn with their operations relatively unscathed, bolstering confidence that these financial behemoths can handle commodity turbulence.

“The banks still managed earnings growth of 6 per cent and 4 per cent in fiscal 2015 and fiscal 2016, respectively, and loan books would have benefited from clean up and monitoring brought on by the last downturn,” Mr. Sedran said.

But the lower oil goes, the bigger the worries.
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