Canadian bank stocks may be running out of runway amid an uncertain outlook and potential recession looming on the horizon, leading some analysts to slash outlooks and hand out downgrades.
Barclays Bank PLC analyst John Aiken downgraded the Royal Bank of Canada, the Bank of Nova Scotia and Toronto-Dominion Bank on May 9, causing the TSX financials index to drop by one per cent.
Though some analysts argue that the Canadian banks haven’t been hit by the full brunt of the United States banking crisis, economic uncertainty ahead is raising concerns for the financial sector. Still, those risks are unlikely to show up when Canadian banks report earnings at the end of the month.
Aiken added that he’s still expecting loans to eke out some growth across the banks, along with help from a stronger rebound in the spring housing market. But he also thinks an expected recession will weigh on credit growth, though it’s not a headwind the banks are facing right now.
Higher interest rates have been a double-edged sword for the banks because they’ve expanded net interest margins, giving banks the potential to earn more on interest at the cost of weighing on mortgage demand. Net interest margin — the gap between interest income a bank earns through lending and the interest it pays out to lenders in areas like chequing accounts — has helped support bank earnings over the past few quarters.
Canaccord Genuity Group Inc. analyst Scott Chan said in a May 9 note that Canadian banks are insulated from the U.S. fallout. However, the Big Six banks have been underperforming the TSX index so far this year, after also lagging last year. Heading into the second quarter, Chan said his team is lowering the bank group’s earnings-per-share forecast by two per cent on expectations of higher expenses and easing loan growth.
