Canadian Bank Profits Expected to Exceed Upward Estimates for Transaction Costs and Reserve Release
Many analysts have raised their stock price targets
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TORONTO – Canadian banks are expected to outperform analysts’ estimates for quarterly earnings as strength in financial markets and wealth management outweighs weak growth in non-mortgage lending, and as they release reserves on relatively few loan losses, investors said.
Many analysts have already revised upward second quarter earnings estimates for the Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Canada. Commerce and the National Bank of Canada, due to improved credit conditions.
Analysts expect the average basic earnings per share of the six major lenders in the three months to April to exceed double that of a year ago, when they set aside nearly $ 11 billion ($ 9.1 billion) to cover possible bad debts. This would be 9.5 percent lower than the previous quarter, largely due to fewer days in the period.
BMO will launch earnings reporting on Wednesday.
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Steve Belisle, portfolio manager at Manulife Investment Management, expects banks to recover some bad debt reserves, although the amount remains uncertain.
Analysts’ estimates “don’t generally expect credit recoveries,” Belisle said.
Firms in the capital markets could post positive surprises, driven by transaction fees and strong issuances, even as a sharp increase in trading income pushed profits up a year ago, Belisle said.
In light of the upward revisions to earnings estimates, many analysts have raised their stock price targets, even though the Canadian bank index has already climbed nearly 60% in the past year, or near the bottom. double the gains seen in the benchmark Toronto equity index.
Optimism around earnings helped the gains, and that could reverse somewhat if they disappoint, said Bryden Teich, portfolio manager at Avenue Investment Management.
The six lenders are trading at 11.5 times futures earnings compared to about 12.65 for their US counterparts.
“The feeling is that valuations in 2022 are not demanding and don’t take into account what’s going to happen with excess capital,” said Barry Schwartz, chief investment officer at Baskin Wealth Management.
Banks that release more reserves could provide insight into the quality of their lending books, Teich said.
“Banks really should be releasing reserves now… because a lot of the loans that have been in arrears, they’re going to write them off or the credit quality has improved,” he said. “Banks that publish a lot of terms tell you that their lending practices have been much better.”