Canada’s banks, recognized as the world’s strongest after a year of record profits and rising share prices, will begin to show the effects of a slackening in domestic consumer lending when they report first-quarter results next week.
“The Canadian banks did very well through all of this mess,” said John Kinsey, who helps manage about C$1 billion ($981 million) at Caldwell Securities Ltd. in Toronto, including bank shares. “Now this is kind of a reality check.”
Royal Bank of Canada (RY), which is trading near an all-time high, Toronto-Dominion Bank (TD) and the country’s four other main lenders are expected to post a 6.9 percent increase in per-share profit excluding some items for the quarter ended Jan. 31, according to Darko Mihelic, an analyst at Cormark Securities Inc. in Toronto.
Canadian banks will probably underperform their U.S. peers, which are starting to see signs of retail banking tailwinds, said John Aiken, an analyst at Barclays Plc. Barclays cut its rating for Canadian Imperial Bank of Commerce to underweight from equal weight, and National Bank of Canada to equal weight from overweight, due to greater reliance on domestic retail banking. The firm raised the rating for Bank of Nova Scotia to overweight and for Royal Bank to equal weight from underweight.
The nation’s banks, ranked the world’s soundest by the World Economic Forum for five straight years, face a consumer- lending slowdown as Canadians struggle with record debt levels and a cooling housing market. Finance Minister Jim Flaherty reduced maximum amortization periods for mortgages last year to rein in borrowing. Bank of Canada Governor Mark Carney has repeatedly warned about carrying too much debt.
The eight-company Standard & Poor’s/TSX Commercial Banks Industry Index has risen 11 percent in the last 12 months, outpacing the little-changed Canadian benchmark S&P/TSX Composite Index while underperforming the 22 percent advance of the 24-company KBW Bank Index (BKX) in the U.S. Royal Bank has been the best performer among Canada’s six-biggest lenders, reaching a record high of C$64.49 on Feb. 20.
Canada’s four biggest banks rose at 4 p.m. in Toronto, led by the 0.7 percent increase of Bank of Nova Scotia.
Household debt reached a record 165 percent of disposable income in the third quarter of 2012. The Bank of Canada’s December Financial System Review called “the high level of household indebtedness” and elevating housing prices the greatest domestic risk to the economy. New home construction plunged 19 percent in January from December to the lowest since the end of 2009, according to Canada Mortgage and Housing Corp.
The reduction in loan growth has already surfaced in the banks’ credit-card portfolios. Growth of personal credit-card loans from chartered banks has stalled, dipping by about 2 percent between November 2011 and December 2012, after increasing by more than 35 percent in the four years ended October 2011.
“The anticipated consumer volume slowdown is a Canadian- specific phenomena, after several years of strong growth,” Aiken said in a Feb. 20 note. “Although the Canadian banks’ valuations should receive support from their dividend yields, we see little impetus for multiple expansion in a slowing earnings growth environment.”
“We’re entering a different era of banking growth in Canada,” said John MacKinlay, financial services consulting leader with PricewaterhouseCoopers LLP in Toronto. “The consumer is largely tapped out in terms of their ability to take on more credit, and they’ve driven so much of the growth over the past four years.”
The banks should be able to compensate for the consumer retrenchment with increased earnings from investment banking, Mihelic said.
“Even with the slow-growth environment and consumer deleveraging happening, there’s still plenty of offsets for the Canadian banks,” Mihelic said in a Feb. 19 telephone interview.
In addition, the country’s five largest lenders are expected to announce increases to their quarterly dividends over the next two weeks, according to Bloomberg Dividend Projections, which had a 92 percent accuracy level in the fourth quarter of 2012. The last time the same five lenders boosted their payouts was the third quarter of 2012.
National Bank, Laurentian Bank of Canada (LB) and Canadian Western Bank (CWB), the smallest of the country’s eight publicly traded banks, are expected to maintain their current dividends, according to the Bloomberg projection.
Rina Cortese, a spokeswoman for Royal Bank, declined to comment, as did National Bank’s Claude Breton and Toronto- Dominion’s Stephen Knight. Spokesmen for the other lenders didn’t immediately return phone calls seeking comment.
Bank of Montreal, the country’s fourth-largest bank by assets, is the first to report results on Feb. 26. The Toronto- based lender is expected to have profit before one-time items of C$1.47 a share, according to the average estimate of 16 analysts surveyed by Bloomberg. That’s up 3.8 percent from a year ago, according to data compiled by Bloomberg.
Four of Canada’s six largest lenders are scheduled to report results Feb. 28. Royal Bank, the country’s largest by assets, will increase adjusted profit by 5.7 percent to C$1.32 a share, according to the average estimate of 15 analysts. Toronto-Dominion, the second-largest, will have a 4.1 percent profit increase to C$1.94 a share, a survey of 15 analysts found.
Canadian Imperial and National Bank (NA), respectively the fifth- and sixth-largest banks, are also scheduled to report earnings Feb. 28. CIBC’s profit is estimated to rise 6.2 percent on an adjusted basis to C$2.09 a share and National Bank’s profit will climb 1.1 percent to C$2.02 a share, according to the average estimate of 14 analysts.
Bank of Nova Scotia, Canada’s third-largest lender, is estimated to have profit of C$1.26 a share, a 9.1 percent increase from the year-earlier period, when it reports results March 5.