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Analysts cautious on big bank earnings amid recessionary headwinds

CANADIAN BANK BUILDINGS ON BAY STREET.
CANADIAN BANK BUILDINGS ON BAY STREET.

Analysts are erring on the side of caution in their earnings forecasts for the Big Six banks, as recession risks loom and a combination of factors are working against the country’s major lenders. 

At least two analysts have revised their earnings expectations for the fourth quarter, pointing to volatile markets, the need to set more money aside for bad loans and and increasing funding costs among other headwinds. 

Canadian Imperial Bank of Commerce analyst Paul Holden and his team slashed adjusted earnings estimates across the sector by about 1.5 per cent on average for the fourth quarter and by 1.6 per cent for full-year in 2023. 

“The biggest drivers are lower capital markets revenue, less wealth management revenue and higher operating expenses,” Holden wrote in a Nov. 18 note, adding that the two dominant themes for the quarter would be net interest margin expansions and higher credit provisioning. “Overall, our adjusted (earnings per share) estimates imply earnings will be down two per cent (year-over-year) and (quarter-over-quarter) on average.” 

Expanding net interest margins, or the spread a bank earns between interest income and interest expenses, has been a leading theme for the banks this year as the Bank of Canada engaged in an aggressive rate hiking cycle that brought the policy rate from near-zero to 3.75 per cent in October. The hikes created a trade-off in that while they dampened demand for loans, they also increased the amount of interest the banks can charge as they moved their prime rates up in tandem with each central bank hike. 

CIBC analysts expect expanding net interest margins to remain as the banks’ primary drivers, benefitting Toronto-Dominion bank and the Royal Bank of Canada the most since they would have the best operating leverage. 

Scott Chan, an analyst at Canaccord Genuity, and his also revised adjusted earning estimates down three per cent, pointing to growing macroeconomic concerns for dragging on bank stocks this year. 

“With macro concerns continued at the forefront (e.g. inflation, housing, geopolitical, recession fears), the Big Six banks have modestly underperformed the TSX Composite since (the third quarter 2022) reporting season and (year-to-date),” Chan wrote in an Nov. 21 note. 

Most of Canada’s biggest banks have seen their stock performance lag this year with shares of RBC slipping just over one per cent since the beginning of the year, the Bank of Montreal’s stock falling nearly six per cent, TD down over eight per cent, CIBC off 13 per cent, and the Bank of Nova Scotia tumbling the most at 21 per cent. Shares of National Bank managed to eke out a slight gain. 

National Bank analyst Gabriel Dechaine said recession risks were keeping Canada’s bank stocks “in check,” and that the share prices currently indicate a 55 per cent probability of a recession. 

Despite the headwinds, Dechaine took a more optimistic tone in his preview note, pointing primarily to margin expansion as an upside as the banks had a seven-basis point boost in their margins in the last quarter. Dechaine was also less deterred by provisions for loan losses. 

“(Third quarter 2022) marked the first quarter of performing provision additions across the Big Six since (fourth quarter 2020),” Dechaine wrote in a Nov. 17 note to clients. “The shift resulted from banks taking a more cautious outlook for credit risk, given the higher probability of an upcoming recession. However, the performing (allowance for credit loss) ratio actually declined (quarter-over-quarter), as loan growth outpaced provision ‘build.'” 

Dechaine also pointed to the Bank of Canada’s more dovish pivot and expectations that the current rate hiking cycle may be nearing its end as a positive sign for the banks as slowing mortgage demand risks could moderate. 

The upcoming quarter will give investors a better look under the hood on how the banks are closing out 2022 and how well-positioned they are to withstand an economic downturn. 

Scotiabank will kick off earnings week on the morning of Nov. 29.

• Email: shughes@postmedia.com | Twitter: