As Canada Alternative Lenders Drop, RBC Sees Bank Earnings Hit

  • Mihelic trims earnings, price targets for largest lenders
  • Canadian residential mortgage growth to be cut in half

Canada’s largest banks face declining earnings in the coming years as mortgage volumes shrink under new rules introduced by the federal government this week to tame the country’s housing market, according to analysts at Royal Bank of Canada.

Darko Mihelic, an analyst at Royal Bank’s Capital Markets unit, slashed his projection for annual Canadian residential mortgage growth to 2.3 percent, about half the previous average assumed for Canadian banks. He also cut his earnings per share estimates for most of the nation’s largest lenders for 2017 and 2018, including Toronto-Dominion Bank and Bank of Nova Scotia.

“The changes announced by the Department of Finance on Monday will likely impact the Canadian banks in the form of lower mortgage volumes,” Mihelic said in a report to clients Wednesday.

Mihelic is among the first to lower earnings estimates for Canadian banks after Finance Minister Bill Morneau introduced measures on Monday to cool housing markets in Toronto and Vancouver and curb the rise in household debt. The moves include tougher standards to get mortgage insurance and increased stress tests for homebuyers. The government is also cracking down on non-residents who have been using a loophole to gain exemptions on capital gains taxes on the sale of their homes.

The fallout from the new measures has so far fallen on alternative lenders and the mortgage insurance companies. Genworth MI Canada Inc. has plunged a record 12 percent in two days, while First National Financial Corp. has wiped out almost 20 percent in value during a three-day slide. A gauge of the country’s bank stocks index has been little changed since the news.

Mihelic lowered his earnings estimates for Bank of Montreal, Scotiabank, Canadian Imperial Bank of Commerce, National Bank of Canada and Toronto-Dominion by an average of 0.9 percent in 2017 and 1.5 percent in 2018. He also cut his price targets for Bank of Montreal, Scotiabank, CIBC, National Bank and Laurentian Bank of Canada, while keeping ratings on the stocks unchanged.

Growth assumptions for residential mortgages outside of Canada remain unchanged, so estimates for Canadian lenders with international exposure including Bank of Montreal, Scotiabank and Toronto-Dominion remain slightly higher, he said.

While the “perception of risk” is heightened, the changes introduced are unlikely to ultimately harm the economy or bank earnings in a material way, Mihelic said.

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