Canadian banks expect Q1 profit growth, but costs and margins could take a hit

TORONTO, Feb 22 (Reuters) – Canadian banks are expected to post higher profits in the first quarter than a year ago, helped by weak loan loss provisions and improving loan demand, but the rising costs is an area of ​​interest for investors.

Analysts Predict Canada’s Big Six Banks – Royal Bank of Canada (RY.TO)Toronto-Dominion Bank (TD.TO)Bank of Nova Scotia (BNS.TO)Bank of Montreal, Canadian Imperial Bank of Commerce (CM.TO) and National Bank of Canada (NATO.TO) – to post an average increase of 6% in adjusted earnings per share during the three months ending in January.

However, excluding the impact of provisions and taxes, earnings could be lower than the prior year, with expense growth outpacing revenue expansion and a weaker contribution from capital markets units following the strength year, CIBC Capital Markets analysts wrote in a recent note.

The Royal Bank launches the publication of results on Thursday.

Canadian banks posted record profits throughout the pandemic as strong mortgage, trading and transaction activity helped offset an evaporation in demand for other types of credit. Now, with the end of restrictions and accommodative government and central bank policies, earnings drivers are also starting to change.

“Mortgage growth will continue to be strong, it’s no surprise,” said Rob Colangelo, vice president and senior credit manager at Moody’s Investors Service. “But other types of loans, credit cards, auto loans, there’s a return to growth there.”

Provisions for credit losses are also expected to continue to decline as banks continue to release capital they had set aside in anticipation of bad loans that failed to materialize, Colangelo said.

But spending is among the biggest uncertainties in the quarter, especially related to compensation, driven by a tight labor market.

“There’s a lot of movement, especially in the financial services sector, and a lot of it is driven by salaries,” Philip Petursson, chief investment strategist at IG Wealth Management. “I’m curious how much of an impact this is having on banks.”

The phenomenon is global, with major Wall Street banks raising salaries and bonuses to attract and retain talent, particularly in investment banking units. Read more

Soaring inflation and planned business investment could also exacerbate cost pressures, although earnings remain challenging in the quarter.

CIBC analysts predicted year-over-year revenue growth of just 1% in the first quarter, noting that central bank interest rate hikes that could help have yet to happen.

“The natural compensation for inflation is higher interest rates,” they wrote in a note. “The inflationary impacts are happening now and the tariff advantages are in the future.” The Bank of Canada is widely seen as raising rates at its March 2 meeting.

A long-awaited improvement in net interest margins may also not have materialized during the quarter. Although fixed rates on mortgages have risen, they have done so at a slower pace than short-term rates, which determine banks’ borrowing costs and have risen in anticipation of central bank rate hikes . Read more

With the Canadian Banks Index (.GSPTXBA) up 115% since its low in March 2020, compared to an 89% gain for the Toronto stock index (.GSPTSE)bank stocks have more downside risk, Petursson said.

“If the banks surprise on the upside, I’m not as confident that we’ll see a significant uptick in equity performance,” he said. But if earnings disappoint, “you could see a bigger downside hit.”

Reporting by Nichola Saminather; Editing by Andrea Ricci

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