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Canada banks to post muted first quarter; stress test change may lift mortgages

TORONTO (Reuters) - Canadian banks are set to post muted quarterly profit growth, driven by higher credit provisions, when they begin reporting earnings on Friday, but a change to a mortgage stress test could brighten prospects for the year, investors and analysts said.

FILE PHOTO: The Royal Bank of Canada (RBC) logo is seen outside of a branch in Ottawa, Ontario, Canada, February 14, 2019. REUTERS/Chris Wattie/File Photo

Canada's biggest lender, Royal Bank of Canada RY.TO, will kick off banks' first-quarter earnings reports, following the sector's worst year for growth since the financial crisis.

Analysts expect quarterly earnings per share to grow 4% to 6% from a year ago, similar to the forecast pace for fiscal 2020, and an increase in loan-loss provisions of between 9% and 15%.

“Until this trend is broken, we believe investors will remain cautious on the sector due to uncertain earnings expectations,” said National Bank Financial analyst Gabriel Dechaine.

Canadian bank stocks .GSPTXBA have risen 1.9% over the past year, underperforming the Toronto stock benchmark's .GSPTSE 11.8% gain.

Rising bad-loan provisions due to economic uncertainties, oil price declines and rising consumer insolvencies are expected to continue to weigh on banks during the quarter. While some headwinds, such as the U.S.-China trade war, have eased, they have been replaced by other concerns.

The coronavirus outbreak was mentioned by 75% of U.S. companies on the S&P 500 index .SPX reporting earnings, said Diana Avigdor, head of trading at Barometer Capital, who is positive on banks.

“So there might be some possibility that (Canadian banks) will prepare something for this,” she said.

But a change to a government-mandated mortgage stress test that would lower the qualifying rate for borrowers, set to take effect on April 6, could boost home loans this year.

“We welcome the change ... because it should, at the margin, improve mortgage loan demand,” said Brian Madden, portfolio manager at Goodreid Investment Counsel, who holds bank shares.

“A lot of market share was slipping away from the banks to the shadow banking sector,” he added. “This should hopefully stem that.”

With mortgage pricing expected to remain competitive, the “slightly better incremental mortgage growth” could be offset by lower margins, said Canaccord Genuity analyst Scott Chan.

For every 1% divergence in the growth rate between residential mortgages and other loans, earnings would be adversely affected by 0.5% on average, Credit Suisse analysts wrote in a note last month.

“Banks are starving for growth,” said Greg Taylor, chief investment officer at Purpose Investments. “But they are going to have to look at their internal risk controls to see if they want to be extending more mortgages in an already inflated market.”

Reporting By Nichola Saminather; Editing by Richard Chang

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