What's in store for Canada's big banks
National PostThe signs are pointing to another strong set of results as Canada's banking sector shakes free from the shackles that have depressed earnings.Canada's Big Six banks don't start reporting second-quarter earnings until May 26, but the signs are pointing to another strong set of results as the sector shakes free from the shackles that had previously depressed earnings.
Barclays Capital analyst John Aiken thinks the results will hinge on meeting or exceeding credit expectations.
"As a result of the U.S. banks' earnings season, the bar has been raised on anticipated credit improvements," he said in a note to clients. "The U.S. experience illustrates that pressure on these portfolios is easing."
Mr. Aiken believes Canada's banks will see another significant drop in provisions for credit losses, but cautioned that sentiment will be driven by whether these declines meet rising expectations. He recently upgraded the sector to positive from neutral on more confidence that the economic recovery is taking hold.
Stonecap Securities analyst Brad Smith is less optimistic and thinks the surprisingly strong first quarter will be a tough act to follow.
He highlighted the renewed deterioration in U.S. personal and commercial credit markets seen in recent U.S. bank and FDIC call report data. The analyst also suggested that the re-acceleration of domestic consumer bankruptcies in February limits the likelihood that provisioning levels will maintain their pace of decline reported in the first quarter.
With valuations ranging from 11x to 12x forward consensus earnings, Mr. Smith pointed out that Canadian bank stocks are trading closer to their peaks (13x-14x) than their troughs (6x -7x). This leaves share prices "vulnerable to any whiff of missed expectations."
He expects share prices will remain in a trading range for the next several months unless they are jolted upward by a surprise return to dividend growth or downward by confirmation of continuing dislocation in global sovereign debt markets.
Desjardins Securities analyst Michael Goldberg thinks many of the Canadian banks are close to fully valued and sees a "near-zero" likelihood of dividend increases until the new Basel 2.1 capital rules are clearer, expected by the end of 2010.
"If there are surprises compared with our forecasts, they are likely to be positive surprises, with higher-than-expected trading revenue and lower-than-expected net nonperforming loan formations," he told clients.
When the Big Six entered fiscal 2010, they faced two major headwinds – macroeconomic factors pressuring the credit recovery and pending new rules on capital regulation. Mr. Goldberg believes that the Canadian economy is recovering steadily and the worst is over for domestic banks in terms of the credit cycle and its impact on earnings. However, pending capital rules remains as the key remaining headwind.
HSBC Canada released its first quarter results Thursday. While it has a March quarter end, the two months of overlap with the Big Six (April quarter end) provides some insight as to what may be coming.
While HSBC's margins remained fairly stable in the quarter, its provision for credit losses declined sharply, down 52% compared with the previous quarter. If the bank's dramatic improvement in credit quality and continued strength in both trading revenues and non-interest revenues is repeated or exceeded by the Big Six, Mr. Aiken of Barclays expects to see a third straight strong quarter.
While the appreciating Canadian dollar will serve as a headwind to earnings, he said it will benefit the banks with large U.S. exposures through declining impaired loan balances and lower levels of risk-weighted assets.
jratner@nationalpost.com
Read more: http://www.financialpost.com/news-sectors/financials/story.html?id=3024094#ixzz0nuQB68uQ
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