Yahoo Finance Banks beat the street, but can they outrun the downturn?
Most of Canada’s biggest banks beat the street in the first quarter, but analysts and investors alike are holding off on the celebrations.
Mounting expenses, macroeconomic storm clouds and the fact that capital markets were one of the lone bright spots all dampened enthusiasm for the beat.
National Bank of Canada analyst Gabriel Dechaine said the valuations for Canada’s banks alone don’t excite his team about the sector, adding that the Canadian Imperial Bank of Commerce and National Bank were the only two banks that had shares closing out the trading day in the green after reporting results.
“We believe investors have become warier, not only of the potential impact of a recession, but of mounting growth headwinds (e.g., net interest margin compression, loan-growth deceleration, expense inflation),” Dechaine wrote in a Mar. 5 note. “In our view, though, conditions need to become worse before they get better. And, in turn, it is still early for us to turn bullish on the sector.”
On average, bank stocks were down three per cent on the day earnings were released. The Bank of Nova Scotia’s shares fell the furthest, tumbling nearly six per cent after earnings fell short of expectations. Canaccord Genuity analyst Scott Chan downgraded the bank from a “buy” to a “hold” as a result.
Chan also pointed to the capital markets segment as the main driver for growth in the banks’ “other income” section, which grew by 12 per cent since last year and came in well above his team’s expectations.
John Aiken, senior analyst and head of research at Barclays Bank PLC, struck the same tone when CIBC kicked off earnings week on Feb. 24. While Aiken noted that the bank had a strong headline beat, he said the market was likely to “temper its enthusiasm to a certain degree” since capital markets was doing most of the heavy lifting.
Aiken took a neutral or negative view of most of the other Big Six banks except for the Bank of Montreal for its growth from the Bank of the West transaction and Toronto-Dominion Bank because of the strength in its U.S. and Canadian banking segments.
Scotiabank was the only bank reporting in the first quarter that fell short of analyst expectations, which Aiken said would likely be viewed as a disappointment. On an adjusted basis, Scotiabank earned $1.85 per share whereas Bloomberg analysts were expecting $2.02 per share on average. This marked a 14 per cent drop from the approximate $2.8 billion reported in the first quarter last year.
The disappointment was not lost on Scotiabank chief executive Scott Thomson, who took the time during his first conference call as head of the company to discuss how the bank would be more deliberate in expense management and capital allocation.
“We have not delivered the level of total shareholder returns that our shareholders should expect of us,” Thomson told shareholders on Feb. 28.
These earnings come during a time when recession risks are looming larger. Banks have been preparing for a downturn, setting more funding aside for loans potentially going sour over the past year and raising credit-loss provisions again in the first quarter.
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However, the quarter showed little evidence that a slowing economy has been weighing on core banking businesses. Analysts at Fitch Ratings noted that loan growth still held strong year-over-year with double-digit increases, largely led by the commercial side. However, since last quarter, personal loans dragged down the overall loan growth as the Bank of Canada’s aggressive rate-hiking cycle begins to bite.
Fitch added that excluding the one-time excess-profit tax and acquisition costs that weighed on earnings, results were largely flat compared to last year.
• Email: shughes@postmedia.com | Twitter: StephHughes95
