Canadian bank lending growth, provisions set to encourage year-over-year profit growth

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TD Bank, CIBC and Bank of Montreal are seen in the financial district as the provincial phase 2 of reopening coronavirus disease (COVID-19) restrictions begins in Toronto, Ontario, Canada on June 24, 2020. REUTERS / Carlos Osorio

TORONTO, Aug. 19 (Reuters) – Canadian bank profits in the third quarter are expected to decline from the previous quarter, as capital market income declines after several strong periods, but is expected to rebound from a year ago as loan growth picks up and so do provisions for lower credit losses (PCL).

Adjusted average earnings of Canada’s six largest banks – Royal Bank of Canada (RY.TO), Toronto-Dominion Bank (TD.TO), Bank of Nova Scotia (BNS.TO), Bank of Montreal (BMO.TO) , Canadian Imperial Bank of Commerce (CM.TO) and National Bank of Canada (NA.TO) – expected to fall by about 5% in the three months to July compared to the second quarter, but increase by about 40 % compared to the previous year.

Canadian banks have beaten analysts’ estimates in recent quarters, thanks to large transaction flows and asset management fees, and the recovery of some of the capital set aside last year to cover a potential increase in loan losses, although business and credit card loans remained low and deposits increased.

“As economic activity continues to normalize with reopenings, we expect better loan growth,” said Chhad Aul, portfolio manager of Sun Life Global Investments. “Net interest margins will be another key contributor; with this sharp increase in long-term yields, we’ve finally (had) a steeper yield curve.”

This benefits banks by allowing them to borrow at low interest rates and lend at higher rates.

Canaccord Genuity and Credit Suisse analysts expect financial market activity to decline from the previous quarter.

Data from Canada’s largest stock exchange showing funding declines points to weaker investment banking profits, but higher M&A deals and debt issuance could help mitigate this said Anthony Visano, portfolio manager at Kingwest & Company.

Investors are thinking first of the banks’ plans for their excess capital, built up following a March 2020 moratorium on dividend increases and share buybacks, which is expected to be lifted this year.

Even after the regulator increased the capital cushion banks need to hold to hedge against risk in June, the largest banks had about C $ 51 billion ($ 40.41 billion) in excess capital. Read more

“The most important thing I would like to know as an investor is about dividend increases and share buybacks,” said Chris Blumas, portfolio manager at Raymond James Investment Counsel. “Any kind of advice on updated payout ratios… any kind of color on long-term capital priorities would help.”

The Canadian Banks Index (.GSPTXBA) rose 25% this year, compared to a gain of 16% for the benchmark Toronto Equity Index (.GSPTSE). They are trading at around 11 times forward earnings, slightly above their historical average, compared to 11.7 times for the largest US banks.

Banks could release PCLs again, Credit Suisse analyst Mike Rizvanovic said in a note on Wednesday, estimating provisions at C $ 1.3 billion, a fifth of what they had set aside a year earlier. Collections on bad debts on performing loans will more than offset an expected increase in provisions for bad loans, he added.

However, with COVID-19 cases increasing once again, recoveries may be slow to materialize this quarter, Visano said.

BMO and the Bank of Nova Scotia will launch earnings reports on Tuesday, followed by RBC and National Bank on Wednesday, and CIBC and TD on Thursday.

($ 1 = 1.2622 Canadian dollars)

Reporting by Nichola Saminather; Editing by Bernadette Baum

Our standards: Thomson Reuters Trust Principles.


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