Investors in Canada’s major banks will be looking for signs of loan growth, impacts of the Delta variant and hints of what the Big Six may do with their cash reserves when they report this week.
The banks are widely expected to further unwind the record-breaking amounts of money they set aside last year — at least $16.5 billion across the Big Six — to cover widespread loan defaults that never materialized.
Shareholders, however, have already largely factored in the earnings boost from the reserve winddown, as was already seen in U.S. bank earnings last month, said James Shanahan, senior equity research analyst for North American financials at Edward Jones.
“In some cases there were earnings beats of 10, 20, 30 per cent, and the stocks were down. So the market clearly isn’t going to reward the Canadian banks if they deliver huge earnings beats and it’s just simply related to reserve releases.”
Loan growth will be a key area to watch as the economy reopens. Many people and companies have used extra cash during the pandemic to pay down debts, putting pressure on a key area for the financial sector.
Canadian bank lending hasn’t been hit as hard on loans as the U.S. though, thanks largely to residential mortgage lending that drives about two-thirds of Canadian bank loan portfolios, Shanahan said.
The mortgage business has been brisk in Canada this year as both home sales and prices spiked, which has benefited the banks but has also increased concerns about household debt.
The Bank of Canada said in a financial review in May that high household debt and imbalances in the housing market both intensified over the past year.
“The housing market boom and the corresponding rise in mortgage debt support economic growth in the short term but increase the risk to the Canadian economy and financial system over the medium term.”
Debt levels also prompted Fitch Ratings Inc. in July to downgrade its rating on the operating environment for Canadian banks by a notch to reflect “elevated levels of private and public sector indebtedness, which Fitch views as negative for long-term credit conditions and business volumes.”
Nigel D’Souza, a financial services investment analyst at Veritas Investment Research, said overall debt levels are a potential concern, but the monthly carrying costs of those debts is the more important factor.
“It’s a potential risk, but until interest rates start to move higher, and the cost of servicing those debts start to move higher, I don’t think you’re going to see it translate to any credit risk.”
The more immediate headwind for banks could be slowing activity on the capital markets front, D’Souza said. Banks have seen a boost to trading revenue, as well as underwriting and advisory fees as more companies raise money and make public offerings in what has been elevated market activity in general.
Capital markets revenue could fall by seven per cent, quarter over quarter, estimates CIBC analyst Paul Holden, which will help push down overall earnings per share by an estimated average of 2.5 per cent from the previous quarter.
“Transaction volumes for equities, derivatives and fixed income all point to lower trading revenue,” Holden said in a note.
Looking ahead, the other big unknown for banks is the question of dividend increases and share buybacks, which were banned byCanada’s banking regulator last year when the economic impacts of the pandemic were unclear.
Those restrictions are still in place, but analysts expect them to be lifted at the end of October, when the Office of the Superintendent of Financial Institutions has said it will be adjusting the amount of capital that banks are required to hold.
Like so much else in financial outlooks though, delays in reopenings due to the Delta variant could push the timing on dividends further out.
With so much uncertainty in the transition, investors may be somewhat cautious in their response to earnings in the quarter, much like they were with U.S. earnings, Shanahan said.
“The overall reaction to large U.S. bank earnings was muted, and I would kind of expect that to be the case.”
Scotiabank and Bank of Montreal report on Tuesday, followed by National Bank and Royal Bank on Wednesday and CIBC and TD Bank on Thursday.
FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.
Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.
The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.
Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.
Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.
Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.
Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.
This report by The Canadian Press was first published Sept. 16, 2024.
OTTAWA – Finance Minister Chrystia Freeland says the government is making some changes to mortgage rules to help more Canadians to purchase their first home.
She says the changes will come into force in December and better reflect the housing market.
The price cap for insured mortgages will be boosted for the first time since 2012, moving to $1.5 million from $1 million, to allow more people to qualify for a mortgage with less than a 20 per cent down payment.
The government will also expand its 30-year mortgage amortization to include first-time homebuyers buying any type of home, as well as anybody buying a newly built home.
On Aug. 1 eligibility for the 30-year amortization was changed to include first-time buyers purchasing a newly-built home.
Justice Minister Arif Virani is also releasing drafts for a bill of rights for renters as well as one for homebuyers, both of which the government promised five months ago.
Virani says the government intends to work with provinces to prevent practices like renovictions, where landowners evict tenants and make minimal renovations and then seek higher rents.
The government touts today’s announced measures as the “boldest mortgage reforms in decades,” and it comes after a year of criticism over high housing costs.
The Liberals have been slumping in the polls for months, including among younger adults who say not being able to afford a house is one of their key concerns.
This report by The Canadian Press was first published Sept. 16, 2024.
OTTAWA – Statistics Canada says manufacturing sales rose 1.4 per cent to $71 billion in July, helped by higher sales in the petroleum and coal and chemical product subsectors.
The increase followed a 1.7 per cent decrease in June.
The agency says sales in the petroleum and coal product subsector gained 6.7 per cent to total $8.6 billion in July as most refineries sold more, helped by higher prices and demand.
Chemical product sales rose 5.3 per cent to $5.6 billion in July, boosted by increased sales of pharmaceutical and medicine products.
Sales of wood products fell 4.8 per cent for the month to $2.9 billion, the lowest level since May 2023.
In constant dollar terms, overall manufacturing sales rose 0.9 per cent in July.
This report by The Canadian Press was first published Sept. 16, 2024.
