On average, the bank industry’s profits for the quarter that ended April 30 could fall 5 per cent compared with the same period last year.Fred Lum/The Globe and Mail
Investors are expecting Canada’s largest banks to report strong financial results for the second quarter that just ended. What happens next could be cause for greater concern.
Big bank earnings are likely to be robust, easing back from giddy highs a year ago as revenue from trading and investment banking dips and loan loss reserves start to creep up from unusually low levels. But analysts are looking ahead for signs the rate of growth in banks’ lending could be starting to slow as rising interest rates and economic turmoil begin to eat into demand for mortgages and other new loans.
On average, the industry’s profits for the quarter that ended April 30 could fall 5 per cent compared with the same period last year, when banks blew past estimates to report soaring profits, according to estimates in a research note by Sohrab Movahedi, an analyst at BMO Nesbitt Burns Inc.
Bank of Montreal BMO-T and Bank of Nova Scotia BNS-T are first to report earnings on May 25, followed by Royal Bank of Canada RY-T, Toronto-Dominion Bank TD-T and Canadian Imperial Bank of Commerce CM-T the following day. National Bank of Canada NA-T will be the last of the Big Six lenders to release results on May 27.
Mr. Movahedi estimates quarterly revenue will rise by 2 per cent on average, with the rate of growth in loan portfolios remaining strong, supported by strong mortgage demand, while rising interest rates should help boost profit margins on those loans. But some banking analysts are already looking past the second-quarter figures for signals the pace of borrowing could fall by next year, raising the prospect of leaner results to come.
“We expect the banks will post another set of strong results in [the fiscal second quarter], but with an economic slowdown increasingly being priced in, headline results might not matter all that much,” said Paul Holden, an analyst at CIBC World Markets Inc., in a note to clients. “We should not extrapolate strong growth this quarter into future quarters. Rapidly increasing borrowing costs and economic uncertainty will dampen future demand.”
Mr. Holden estimates that banks’ loan books will still expand by an average of 9.6 per cent for their fiscal year, which ends Oct. 31, thanks to a strong start. But he expects that rate of growth will be cut in half for fiscal 2023, falling to 4.7 per cent.
One key reason analysts expect slower growth is an anticipated cooling of the housing market after a two-year hot streak. Home prices fell nationally from March to April, and some economists are predicting a correction in prices in some regions.
Increases in mortgage balances “have been running at unsustainably strong levels since late 2020,” said Gabriel Dechaine, an analyst at National Bank Financial Inc., with most banks posting consistent double-digit percentage increases year over year. But because mortgages typically generate low profit margins for banks, the hit to revenue from a sharp slowdown should be manageable, he said.
If the current year-over-year rate of mortgage growth of 10 per cent was halved, he estimates banks’ revenue and earnings per share would have been about 0.3 per cent lower. Instead, concerns about a possible recession or a period of stagflation – a combination of rising prices and slow economic growth – “are the most relevant bank stock driver,” Mr. Dechaine said.
In that context, rising interest rates are a “double edged sword,” said John Aiken, an analyst at Barclays Capital Canada Inc. They will help increase profit margins banks earn from loans, which were squeezed during a prolonged period of rock-bottom borrowing costs. But they are also likely to reduce demand for borrowing by making it more expensive, most notably for mortgages and personal loans.
A gradual uptick in provisions for credit losses – the money banks set aside to cover loans that may default – is also likely to dampen bank profits. In the near term, provisions will still be modest, creeping up from historically low levels when COVID-19 support and other fiscal and monetary stimulus drove down defaults.
But lately, bank profits have been padded as they recovered provisions set aside during the pandemic that were no longer deemed necessary because actual losses on loans were much lower than expected.
With the war in Ukraine and rising inflation driving concerns about the potential for a recession, banks are expected to slow or pause those releases of loan loss reserves.
Revenue from fees is also likely to dip as the pace of equity and debt issuance has slowed, and tumbling stock and bond markets will eat into returns from wealth management.
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TOKYO (AP) — Japanese technology group SoftBank swung back to profitability in the July-September quarter, boosted by positive results in its Vision Fund investments.
Tokyo-based SoftBank Group Corp. reported Tuesday a fiscal second quarter profit of nearly 1.18 trillion yen ($7.7 billion), compared with a 931 billion yen loss in the year-earlier period.
Quarterly sales edged up about 6% to nearly 1.77 trillion yen ($11.5 billion).
SoftBank credited income from royalties and licensing related to its holdings in Arm, a computer chip-designing company, whose business spans smartphones, data centers, networking equipment, automotive, consumer electronic devices, and AI applications.
The results were also helped by the absence of losses related to SoftBank’s investment in office-space sharing venture WeWork, which hit the previous fiscal year.
WeWork, which filed for Chapter 11 bankruptcy protection in 2023, emerged from Chapter 11 in June.
SoftBank has benefitted in recent months from rising share prices in some investment, such as U.S.-based e-commerce company Coupang, Chinese mobility provider DiDi Global and Bytedance, the Chinese developer of TikTok.
SoftBank’s financial results tend to swing wildly, partly because of its sprawling investment portfolio that includes search engine Yahoo, Chinese retailer Alibaba, and artificial intelligence company Nvidia.
SoftBank makes investments in a variety of companies that it groups together in a series of Vision Funds.
The company’s founder, Masayoshi Son, is a pioneer in technology investment in Japan. SoftBank Group does not give earnings forecasts.
Shopify Inc. executives brushed off concerns that incoming U.S. President Donald Trump will be a major detriment to many of the company’s merchants.
“There’s nothing in what we’ve heard from Trump, nor would there have been anything from (Democratic candidate) Kamala (Harris), which we think impacts the overall state of new business formation and entrepreneurship,” Shopify’s chief financial officer Jeff Hoffmeister told analysts on a call Tuesday.
“We still feel really good about all the merchants out there, all the entrepreneurs that want to start new businesses and that’s obviously not going to change with the administration.”
Hoffmeister’s comments come a week after Trump, a Republican businessman, trounced Harris in an election that will soon return him to the Oval Office.
On the campaign trail, he threatened to impose tariffs of 60 per cent on imports from China and roughly 10 per cent to 20 per cent on goods from all other countries.
If the president-elect makes good on the promise, many worry the cost of operating will soar for companies, including customers of Shopify, which sells e-commerce software to small businesses but also brands as big as Kylie Cosmetics and Victoria’s Secret.
These merchants may feel they have no choice but to pass on the increases to customers, perhaps sparking more inflation.
If Trump’s tariffs do come to fruition, Shopify’s president Harley Finkelstein pointed out China is “not a huge area” for Shopify.
However, “we can’t anticipate what every presidential administration is going to do,” he cautioned.
He likened the uncertainty facing the business community to the COVID-19 pandemic where Shopify had to help companies migrate online.
“Our job is no matter what comes the way of our merchants, we provide them with tools and service and support for them to navigate it really well,” he said.
Finkelstein was questioned about the forthcoming U.S. leadership change on a call meant to delve into Shopify’s latest earnings, which sent shares soaring 27 per cent to $158.63 shortly after Tuesday’s market open.
The Ottawa-based company, which keeps its books in U.S. dollars, reported US$828 million in net income for its third quarter, up from US$718 million in the same quarter last year, as its revenue rose 26 per cent.
Revenue for the period ended Sept. 30 totalled US$2.16 billion, up from US$1.71 billion a year earlier.
Subscription solutions revenue reached US$610 million, up from US$486 million in the same quarter last year.
Merchant solutions revenue amounted to US$1.55 billion, up from US$1.23 billion.
Shopify’s net income excluding the impact of equity investments totalled US$344 million for the quarter, up from US$173 million in the same quarter last year.
Daniel Chan, a TD Cowen analyst, said the results show Shopify has a leadership position in the e-commerce world and “a continued ability to gain market share.”
In its outlook for its fourth quarter of 2024, the company said it expects revenue to grow at a mid-to-high-twenties percentage rate on a year-over-year basis.
“Q4 guidance suggests Shopify will finish the year strong, with better-than-expected revenue growth and operating margin,” Chan pointed out in a note to investors.
This report by The Canadian Press was first published Nov. 12, 2024.
TORONTO – RioCan Real Estate Investment Trust says it has cut almost 10 per cent of its staff as it deals with a slowdown in the condo market and overall pushes for greater efficiency.
The company says the cuts, which amount to around 60 employees based on its last annual filing, will mean about $9 million in restructuring charges and should translate to about $8 million in annualized cash savings.
The job cuts come as RioCan and others scale back condo development plans as the market softens, but chief executive Jonathan Gitlin says the reductions were from a companywide efficiency effort.
RioCan says it doesn’t plan to start any new construction of mixed-use properties this year and well into 2025 as it adjusts to the shifting market demand.
The company reported a net income of $96.9 million in the third quarter, up from a loss of $73.5 million last year, as it saw a $159 million boost from a favourable change in the fair value of investment properties.
RioCan reported what it says is a record-breaking 97.8 per cent occupancy rate in the quarter including retail committed occupancy of 98.6 per cent.
This report by The Canadian Press was first published Nov. 12, 2024.
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