Canada’s ‘big six’ banks set to impress in Q3, say analysts

Canada’s big banks are expected to deliver a strong fiscal third-quarter, even as new rules threaten mortgage growth and concern over a new North American trade deal lingers.

Third-quarter results begin to roll in on Wednesday, starting with Royal Bank of Canada (RY.TO), followed by Canadian Imperial Bank of Commerce (CM.TO) on Thursday. Bank of Montreal (BMO.TO), Bank of Nova Scotia (BNS.TO) and National Bank of Canada (NA.TO) report next week, with Toronto-Dominion Bank (TD.TO) capping things off on Aug. 30.

The big six bank stocks have had a relatively slow 2018, despite strong profit growth in previous quarters.

Canaccord Genuity analyst Scott Chan is calling for eight per cent earnings per share growth year-over-year in the third quarter for the big six banks, similar to last year. He counts recent signs of housing market stability, equity strength, and ongoing North American trade talks among the themes working in favour of the nation’s biggest lenders.

National Bank of Canada analyst Gabriel Dechaine is calling for seven per cent earnings per share growth in the third quarter.

“There is a strong case to turn bullish on the sector,” he wrote in a recent note to investors. “The bull case becomes even more tempting considering a history of second-half outperformance by the group (nine of the past 11 years).”

Dechaine said long-term investors ought to look past certain focal points in this latest quarter, such as ongoing uncertainty around a new North American Free Trade Agreement, and persisting housing market concerns.

“The ‘Canada story’ is muddied,” he wrote last week. “The setup (for the third quarter) is eerily similar to what we saw in 2017, with tepid performance heading into third-quarter results followed by an 11 per cent rally to close out the year.”

Jitters over Canada’s housing markets, and the government’s efforts to tame them, have cast a long shadow over the nation’s largest banks. The question of how Ottawa’s new mortgage regulations will impact uninsured mortgage originations over the long-term remains to be seen.

Most Canadian lenders saw a spike in new mortgages in their first and second fiscal quarters, as buyers scrambled to secure home loans before the stricter rules took effect.

“As this phenomenon fades, we are expecting to see a sharp drop-off in origination volumes in the second half,” Dechaine said. However, he notes, “This deceleration does not present a material earnings per share risk for the banks, at least in a direct sense.”

Barclays analyst John Aiken expects the downward pressure on mortgage volumes will be counterbalanced in part by the impact of the Bank of Canada four interest rate hikes over the past year on the banks’ net interest margins.

“We anticipate net interest margins should remain stable to positive in the second half of the year, and into 2019,” he wrote in a recent research note. “While new mortgage rules and a slower housing market have tempered mortgage growth, we expect the stronger net interest margins and commercial lending to offset the near-term negative impact.”

Aiken is forecasting dividend increases from CIBC, Royal Bank, and the Bank of Nova Scotia. He maintains an “overweight” rating on the Bank of Nova Scotia, “equal weight” ratings on the Bank of Montreal, National Bank, and TD Bank, and an “underweight” rating on Royal Bank.

Chan has assigned a “buy” rating on four of big six banks, with the exceptions of Royal Bank and the Bank of Montreal, which he rates as as “hold.”

Dechaine has “outperform” ratings on the Bank of Montreal, Royal Bank and TD Bank, and “sector perform” ratings on the Bank of Nova Scotia and CIBC.

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