Source: The Canadian Press
Investors will likely find few reasons to send stock markets higher this coming week as U.S. economic growth data at the end of the week will likely serve as a reminder of how conditions in the world’s biggest economy are deteriorating.
There are high hopes from a slew of earnings coming from the big Canadian banks. But while they’re expected to hand in solid numbers, it could be a stretch for them to improve or even meet the results from the previous two quarters.
North American markets put in a mixed performance last week. The TSX gained 1.68% but that was largely on the back of the resource sector as PotashCorp (TSX:POT) shares surged in the wake of a US$38.6-billion hostile takeover bid by Australian resource giant BHP Billiton. The base metals sector gained 1.74% on hopes that other companies could be ripe for a takeover with a fat share price premium.
But overall sentiment was weak and the Dow Jones industrials fell 0.86% as economic data Thursday, particularly a rise in jobless insurance claims to past the half-million mark, deepened the belief that the American economic recovery is faltering.
Investors will get their best take on the U.S. economy on Friday when the government makes its first revision to second-quarter gross domestic product growth.
The initial report assessed growth coming in at an annual rate of 2.4% and this new look will likely disappoint.
“Based on what we have in hand, it looks like it’s going to be revised to less than 2%,” said Doug Porter, deputy chief economist at BMO Capital Markets.
“I think what we saw is that both consumers and businesses got rattled a bit during the springtime by the tumult in global financial markets.”
Porter said it was rather ironic that the unease was caused by worries about Greece and Europe generally as the European Union and the International Monetary Fund fought to contain a government debt crisis.
“But interestingly, Europe managed to post economic growth of nearly a 4% annual rate in the second quarter,” observed Porter.
“So their economy wasn’t shaken by the events in financial markets but it seemed to have had a fairly substantial impact on U.S. growth.”
Meanwhile, four of the big Canadian banks report fiscal third-quarter results this week, with Bank of Montreal kicking off on Tuesday.
The five big financials raked in a collective $5.01 billion in second-quarter profits — down from $5.09 in the first quarter– and analysts think they will be hard pressed to turn in similar earnings this time out.
For one thing, the banks’ capital markets business will likely reflect a tepid showing on stock markets for the last three months. During that time, the TSX has struggled to maintain the level of where it started the year as investors worried about a slower than expected recovery.
Banks could also see their revenue hit by slower growth in mortgage lending, reflecting a sharp slowdown in the Canadian real estate market.
“When we look at, for example RBC, about 60% of their revenue comes from Canadian banking, which obviously includes lending and commercial mortgage lending and so on,” said Paul Vaillancourt, vice-president at Canadian Wealth Management in Calgary.
“We think in Canada, we’re seeing prices unwind and come back to normalized business, but nothing that’s going to impact the earnings too significantly.”
Investors will particularly view results from Toronto Dominion (TSX:TD) and Royal Bank (TSX:RY) since those two banks have the biggest exposure to the faltering U.S. economy.
However, analysts are quick to point out that the showing from Canadian banks will still be impressive.
“The balance sheets are going to continue to be in solid shape, the improving credit environment will lead to lower loan loss provisions,” said Vaillancourt.
“So we think that perhaps loan-loss provisions have peaked and will continue to decline and so we think the earnings power of the banks are going to continue.”
Vaillancourt also believes the financials are a good buy right now because “I think they’re undervalued.”
“And if you look at the average large cap bank, it’s paying a dividend yield greater than 4% so you’re getting paid 4% — the yield on bonds is a lot lower than that.”
The week ahead: Investor focus moves to Canadian bank earnings, slower than expected U.S. GDP
BMO to kick off earnings season on Tuesday
- By: Malcolm Morrison
- August 22, 2010 August 22, 2010
- 16:34