Royal Bank of Canada, Toronto- Dominion Bank (TD) and other Canadian lenders will report quarterly profit growth of as much as 17 percent, demonstrating the banks’ resilience even as the world’s 11th-largest economy slows.
Market-related revenue such as trading and advisory fees will be the highest in at least five quarters, said Sumit Malhotra, an analyst at Macquarie Capital Markets in Toronto. The banks begin reporting results for the fiscal fourth quarter on Nov. 29, starting with Royal Bank.
“Despite the myriad headwinds and concerns that the operating backdrop continues to present, the Canadian banking sector is set to end 2012 with another year of solid operating performance,” Malhotra said in a note to clients.
Fees for arranging stock sales, trading and merger advice will offset slower growth for domestic mortgages and consumer lending, analysts said. The value of equity financings, including preferred share sales and convertibles, rose 30 percent to $8.63 billion in the quarter ended Oct. 31, according to data compiled by Bloomberg.
“I expect them to show some improvement,” said Michael Smedley, who helps manage about C$1 billion ($1 billion) at Morgan Meighen & Associates in Toronto, including bank shares. “This one should do well, but probably not as excessively well as the third quarter,” he said by phone.
After two years of posting double-digit profit growth, the world’s soundest banks may increase core cash earnings per share by 4 percent next year and 6 percent in fiscal 2014, said Andre- Philippe Hardy, an analyst at RBC Capital Markets in Toronto.
Grinding Out Growth
Royal Bank was closed unchanged at C$57.95 in Toronto today and is up 11 percent this year, compared with a 9 percent gain in the Standard & Poor’s/TSX Financials Index.
“Grinding out earnings growth in a challenging environment is expected to be the theme for the next several years,” said Kevin Choquette, a bank analyst at Scotiabank Global Banking and Markets in Toronto, who forecast average operating profit growth of 17 percent for the fourth quarter from a year earlier. Net income was depressed in the year-earlier period on fewer deals in capital markets.
Market-sensitive revenue for the quarter will climb 21 percent to C$7.1 billion for the industry, Macquarie’s Malhotra said, the highest in at least five quarters. Takeovers completed in the quarter include the C$3.73 billion purchase of TMX Group Inc. by a group of Canadian banks and pension funds, as well as share sales including the C$300 million initial public offering of Robert Friedland’s Ivanplats Ltd. (IVP) mining company in October.
Higher capital markets fees may help to quell an expected housing slowdown, which lenders including Toronto-Dominion have been predicting for a year.
“Recent data, industry contacts and anecdotal evidence all seem to indicate that housing and mortgage activity is softening,” said Jason Bilodeau, an analyst at TD Securities, said in a note. “While we do not expect the housing market to collapse, we do expect aggregate mortgage growth to ease to a mid- to low-single digits pace over the coming year.”
Canada’s housing market has been cooling after Finance Minister Jim Flaherty took measures in June to tighten mortgage lending amid concern a bubble was building in cities such as Toronto and Vancouver. Existing home sales fell 0.1 percent in October from the previous month, according to the Canadian Real Estate Association.
Canada Mortgage & Housing Corp. reported Nov. 8 that housing starts fell 8.9 percent in October. The country’s central bank forecast that housing investment will become a drag on growth next year and in 2014.
Lending volumes are “going to continue to be fairly strong,” John Aiken, an analyst at Barclays Capital, said by phone from Toronto. “We’re still seeing reasonably strong loan growth, but the problem is that’s not going to be a positive factor for the banks because no one is expecting that to continue.”
Royal Bank, the country’s largest lender, is expected to have profit before one-time items of C$1.26 a share, according to the average estimate of 15 analysts surveyed by Bloomberg News. That’s a 14 percent increase from the C$1.11 the bank earned on that basis a year ago.
Bank of Montreal (BMO), the fourth-biggest bank, reports results on Dec. 4. The lender will have profit of C$1.42 a share, according to the analyst estimates, a 11 percent increase.
Toronto-Dominion, the second-largest bank, is expected to report profit of C$1.80 a share, 1.7 percent higher than a year ago. The bank is scheduled to release results Dec. 6, the same day as Canadian Imperial Bank of Commerce. CIBC, the No. 5 bank, is expected to have profit of C$1.98 a share, a 5.9 percent increase.
Bank of Nova Scotia, Canada’s third-largest bank, is expected to post earnings of C$1.19 a share, up 8.2 percent from a year ago.
While Canada’s five largest banks aren’t expected to announce dividend increases, the three smaller banks -- National Bank of Canada, Laurentian Bank of Canada and Canadian Western Bank (CWB) -- may do so, according to Bloomberg Dividend Projections.