{"id":354720,"date":"2018-08-20T06:45:22","date_gmt":"2018-08-20T10:45:22","guid":{"rendered":"https:\/\/www.investmentexecutive.com\/?p=354720"},"modified":"2019-06-20T07:22:39","modified_gmt":"2019-06-20T11:22:39","slug":"canadian-banks-to-report-strong-quarter-amid-housing-stability-interest-rate-hikes","status":"publish","type":"post","link":"https:\/\/www.investmentexecutive.com\/news\/research-and-markets\/canadian-banks-to-report-strong-quarter-amid-housing-stability-interest-rate-hikes\/","title":{"rendered":"Canadian banks to report strong quarter amid housing stability, interest rate hikes"},"content":{"rendered":"

Canada\u2019s biggest banks are expected to report yet another strong quarter as the country\u2019s housing market shows signs of stability and rising interest rates add to their bottom line.<\/p>\n

Royal Bank of Canada (RBC) is the first bank to report its fiscal third-quarter results on Wednesday, and most analysts are expecting \u201csolid\u201d growth across the industry, with estimates of earnings-per-share growth as high as 10% year-over-year.<\/p>\n

\u201cWe believe the earnings environment sets up well for a strong second half… With the Canadian housing market behaving itself, investors can turn their attention away from that and towards earnings, which have been supported by (profit) margin expansion, operating leverage, and growth in the expansion segments,\u201d said Robert Sedran, an analyst with CIBC Capital Markets in a research note.<\/p>\n

Canadian Imperial Bank of Commerce (CIBC) will be the next to report its earnings for the three-month period on Thursday, followed by Bank of Nova Scotia and Bank of Montreal on Aug. 28, National Bank of Canada on Aug. 29 and Toronto Dominion Bank on Aug. 30.<\/p>\n

One factor looming over the banks\u2019s earnings for most of the fiscal year has been housing activity and mortgage originations after tighter lending guidelines were introduced at the beginning of the year.<\/p>\n

National home sales in July were down 1.3% compared to a year earlier, smaller than the double-digit declines seen in previous months. The Canadian Real Estate Association said that the new stress test for uninsured mortgages \u201ccontinues to weigh on home sales but its effect may be starting to fade slightly in Toronto and nearby markets.\u201d However, fewer sales in major urban centres in British Columbia weighed down the overall home sales figure.<\/p>\n

Some analysts say they expect banks\u2019 earnings performance to be driven in part by improvements in housing market stability, particularly in the Greater Toronto Area, but others are advising caution.<\/p>\n

In the fiscal first and second quarters, most Canadian banks got a bump from a spike in mortgage origination at the end of the calendar year as homebuyers rushed to lock in home loans before the new rules took effect on Jan. 1.<\/p>\n

\u201cAs this phenomenon fades, we are expecting to see a sharp drop-off in origination volumes in the second half,\u201d said Gabriel Dechaine, an analyst with National Bank of Canada. Dechaine estimates that for banks to fall in line with their forecast of a 5% drop in uninsured mortgage origination volumes, originations will need to fall by 20% in the second half, he said in a research note.<\/p>\n

Still, Canada\u2019s Big Six banks and Quebec\u2019s Desjardins Group have built up a capital buffer<\/a> and are better prepared for a housing crisis at home than they were in 2016, Moody\u2019s Investor Service said in a recent report.<\/p>\n

Plus, economic fundamentals and a rising interest rate environment on both sides of the border may be poised to offset the impact of slowing mortgage lending growth.<\/p>\n

During the quarter ended July 31, these banks were already benefiting from growing net interest margins \u2014 or the profit made on loans \u2014 as interest rates rose on both sides of the border in previous months. Net interest margins are the difference between the money banks earn on the loans they make and the interest they pay out to savers.<\/p>\n

In July, the Bank of Canada hiked its trend-setting interest rate for the fourth time in a year<\/a> to bring the benchmark from 1.25 to 1.5%, further bulking up those profit margins.<\/p>\n

Last quarter, RBC\u2019s chief financial officer Rod Bolger said that even if the bank\u2019s mortgage growth halves, the impact would be offset by the benefit of one central bank rate hike.<\/p>\n

The country\u2019s recent string of strong economic data \u2014 such as July inflation rising to its highest reading since September 2011 and strong jobs numbers \u2014 raises the likelihood of another potential rate hike in October.<\/p>\n

The Bank of Canada can use interest rate hikes as a tool to help prevent inflation from climbing too high.<\/p>\n

Rising interest rates, however, have been an additional hurdle for many potential first-time and move-up homebuyers, and slowed demand for credit.<\/p>\n

\u201cWith additional rate hikes likely in coming months, housing activity in the second half of this year and 2019 will remain well below the booming pace of the prior five years,\u201d wrote Sherry Cooper, chief economist for Dominion Lending Centres, in a research note.<\/p>\n

Additionally, with each interest rate hike, pressure mounts for banks to pass on those benefits to depositors.<\/p>\n

Still, mortgages are set to have a \u201climited impact\u201d on earnings and \u201crecent data points point to a stabilizing, albeit lower, growth rate.\u201d<\/p>\n

\u201cOffsetting this will be margin expansion, benign credit conditions, positive operating leverage, and the expansion segments,\u201d said Sedran. \u201cWe are still at a point in the economic cycle where rate hikes benefit the banks and so could see recent actions by the Bank of Canada and Federal Reserve extending the margin expansion trend.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"