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Canadian Banks: What to Expect At Earnings this Week

Stock Markets Nov 28, 2022 15:07
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By Ketki Saxena 

Investing.com -- All six of Canada’s big banks will be reporting results this week, and expected to post a decline in fourth quarter profits.

Analysts expect a “kitchen sink” quarter from the big banks as macro headwinds pressure capital market revenue and pipeline deals from investment banking, while the banks continue to shore up provisions for credit losses. Some relief however is expected from business loans. 

Net income at the banks is expected to have fallen 0.8% in the quarter through October, according to Bloomberg’s average of analysts’ estimates. That would follow a 13% decline in the prior quarter.

Here are three things to watch for at Canadian Bank earnings this week:

1. Capital Markets

Total capital-markets revenue for the banks is expected to decline 0.7% from a year earlier, pressured  by macro headwinds and volatile equities that have halted IPOs, but helped boost the bank’s trading activity. In terms of investment banking activity, merger-and-acquisition activity also has slowed from last year’s record pace, nearly halving to $22.8 billion, according to Refinitiv data.

2. Loans 

Business loans  are expected to provide a bit of relief for banks as net interest margin rose by nearly 8 basis points year over year. However, banks are contending with lower personal loans as higher rates effect a housing slowdown. Mortgages account for nearly 65% of the banks' domestic loans. Total net interest income for Canada’s six largest lenders in the fourth quarter may have gained 1.8% from the third quarter, decelerating from that quarter’s 8.3% growth, analysts estimates.

3. Provisions for Credit Losses 

The banks will also be expected to stockpile capital and provisions for credit losses.  On average, the banks' fourth-quarter bad debt provisions are expected to nearly triple from last year and their 2023 forecasts.

Which Canadian banks will be hardest hit? 

Royal Bank of Canada (TSX:RY) and Bank of Montreal (TSX:BMO) with the largest exposure to capital markets businesses, are expected to see the biggest hit to profits. CIBC (TSX:CM), which has over 50% of its loans as domestic retail mortgages, is also expected to be hard hit. 

Analysts note that Bank of Nova Scotia (TSX:BNS) will most likely accelerate its buildback of bad debt provisions, having released them more aggressively during the pandemic than its peers. 

How has the Canadian banking sector fared so far this year? 

Pressured by market volatility, deal slowdown, and a slowdown in consumer spending, the banking sub-index has lost 6.8% so far this year, compared with a 4.7% decline on the TSX Composite. 

Since the Bank of Canada's first rate hike in March, the Big Six Canadian Banks have lost over $63.5 billion of market capitalization.

Canadian Banks: What to Expect At Earnings this Week
 

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