TORONTO (Reuters) – Canadian banks’ profits in the third quarter are expected to decline from the previous quarter as capital market earnings decline after several periods of strong growth, but they are expected to rise from last year as loan growth recovers and provisions build up on credit losses (PCL) drop.
The average adjusted earnings of Canada’s six largest banks – Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada – are expected to fall by about 5% in three months. until July from the second quarter, but rose about 40% from a year earlier.
Canadian banks have surpassed analyst estimates in recent quarters on strong transaction flows and asset management fees, as well as the return of some capital set aside last year to cover a potential spike in loan losses, even as commercial and credit card lending continued to be weak. and deposits increased sharply.
“As economic activity continues to normalize with the resumption of the opening, we expect credit growth to improve,” said Chhad Aul, Sun Life Global Investment Portfolio Manager. “NIM will be another key factor; with such a big spike in long-term yield, we finally (got) a steeper yield curve. “
This benefits banks by allowing them to borrow at low interest rates and lend at higher rates.
Analysts at Canaccord Genuity and Credit Suisse expect a pullback in capital markets from the previous quarter.
Data from Canada’s largest exchange operator showing funding cuts indicate lower returns on investment banking, but higher M&A and debt issuance volumes could help mitigate this, said Anthony Visano, portfolio manager at Kingwest & Company.
Investors are primarily thinking about the banks’ plans for surplus capital created after the March 2020 moratorium on dividend increases and share buybacks, which is expected to be canceled this year.
Even after the regulator increased the buffer capital that banks must hold to hedge against risks in June, the largest banks had about 51 billion Canadian dollars ($ 40.41 billion) in surplus capital.
“The biggest thing I would like to know as an investor is … about dividend increases and share buybacks,” said Chris Blumas, portfolio manager at Raymond James Investment Counsel. “Any type of guidance on updated payout ratios … any color on long-term capital priorities would be helpful.”
The index of Canadian banks is up 25% this year, compared with a 16% rise in the Toronto stock index. Their forward earnings are about 11 times higher, slightly higher than their historical average, compared to 11.7 times for the largest US banks.
Banks may re-issue some PCLs, Credit Suisse analyst Mike Rizvanovich said in a note on Wednesday, estimating reserves at C $ 1.3 billion, a fifth of what they put off a year earlier. Repayments on current loans more than offset the expected increase in provisions for impaired loans, he said.
However, with COVID-19 cases rising again, recovery could start slowly this quarter, Visano said.
BMO and Bank of Nova Scotia will open P&L on Tuesday, followed by RBC and the National Bank on Wednesday, and CIBC and TD on Thursday.
(Reporting by Nicholas Saminater; editing by Bernadette Baum)