February 24, 2013 / 3:33 PM / in 5 years

BAY STREET-Slimmer Canadian bank profits seen as lending slows

* Profit seen rising 7 pct at banks

* Bank of Montreal is first to report on Tuesday

* Housing slowdown, consumer lending to pinch growth

* Five of six banks expected to boost dividends

* Shares of top three banks at or near record highs

By Cameron French

TORONTO, Feb 24 (Reuters) -

Canada’s banks made double-digit profit growth look easy last year. But the going got tougher in the first quarter of this fiscal year as a cooling housing market and a low interest-rate environment started to sap the profits the Big Six earn on loans.

Earnings are still growing, but modestly now and probably not fast enough for bank shares to maintain the momentum that pushed some of them to record highs, especially with U.S. banks becoming more appealing to investors.

Five of the country’s six major lenders are expected to raise their dividends during the quarterly reporting season that starts this week but even that might not lift their shares too much.

Shares of Royal Bank of Canada, the country’s largest lender, hit a record high on Tuesday, while Toronto-Dominion Bank and Bank of Nova Scotia are both trading within percentage points of record levels.

That’s a little surprising. Data shows Canada’s housing market is cooling, while consumer indebtedness is still climbing to new highs, suggesting that a period of de-leveraging is looming for the banks’ clients.

“I just think that at some point the music’s going to stop and we’re going to see some sort of book value multiple contraction commensurate with consumers de-leveraging,” said Tom Lewandowski, a St. Louis-based analyst at Edward Jones.

Forecasters doubt that the de-leveraging will result in a housing crash similar to the one the United States experienced five years ago, but the stress is already showing on bank earnings, which are not expected to soon repeat the routine double-digit percentage gains of past years.


Year-over-year profit growth for Canada’s six biggest banks as a group should be around 7 percent, according to analysts, who by and large see 2013 as a year of slower growth ahead of a possible recovery in 2014.

“Domestic retail banking remains the core engine for the Canadian banks in terms of cash capital generation, but in an environment where expectations are broadly that consumer borrowing will slow down, you have some very significant revenue headwinds,” Barclays Capital analyst John Aiken told Reuters.

Bank of Montreal will be first off the mark on Tuesday, and is expected to report core profit of C$1.47 a share, up from C$1.42 in the first quarter of 2012.

RBC is seen posting a per-share profit of C$1.32 vs a year-before C$1.25, while TD is expected to earn C$1.93 a share, up from C$1.86, and Scotiabank is seen earning C$1.25 per share, up from C$1.15.

Canadian Imperial Bank of Commerce is expected to post a profit of C$2.08 a share, versus C$1.97, while profit per share at smaller National Bank of Canada is expected at C$2.01, up a penny from the year-before quarter.


Canada’s household debt-to-income ratio hit a record high of 164.4 percent in the third quarter of 2012, while the International Monetary Fund said last week that Canadian housing prices were about 10 percent over-valued at the end of 2012.

On top of this, the current environment of low interest rates means the banks earn a narrow margin on new loans, while older loans that were at higher rates are renewed at lower ones.

While the profit-growth concerns, which have been bubbling for about a year now, have not kept the banks’ shares from pushing higher, Aiken says that could change, particularly in comparison with U.S. banks, which are expected to see strong retail banking growth as they recover from the 2008 crisis.

“While we still see some upside potential in the Canadian banks, we believe that they are likely to underperform their U.S. peers, which are starting to see signs of retail banking tailwinds,” he said.

Shares of the six Canadian banks have risen between 3 percent and 18 percent over the past 12 months, with RBC and Scotiabank leading the way with 12 and 18 percent gains, respectively. That compares with a flat performance by the S&P/TSX composite index.

CIBC World Markets analyst Robert Sedran sees a divergence between the three largest banks - RBC, TD, and Scotiabank - and their smaller rivals, as the larger banks’ geographic diversity and size give them more flexibility to weather the Canada-specific revenue growth storm.

While all three banks have vast domestic retail bank networks, they’ve also been expanding abroad aggressively.

RBC now has a large European wealth management arm and a significant wholesale banking presence in the United States, while TD has 1,300 U.S. branches, slightly more than it has in Canada.

And while Scotiabank’s latest big acquisition was a C$3.1 billion deal for online bank ING Direct, it draws much of its profit from its massive presence in Latin America, the Caribbean, and Asia.

“Our stock selections are biased to banks that we believe can grow revenue more rapidly while also more effectively controlling cost. This leads to a bias to the largest three,” Sedran said in a note.

He’s not alone. Analyst ratings on RBC, TD, and Scotiabank tend more towards buys and strong buys than BMO, CIBC, and National Bank, according to Thomson Reuters I/B/E/S.


Despite the profit-growth concerns, the banks have been steadily raising their dividends, and five are expected to hike their payouts when they report first-quarter results.

This makes the stocks appealing when compared with the meager results currently available from bonds or the uncertainty associated economically sensitive resource stocks, observers say.

“Overall, I think they’re still a pretty safe haven in these rocky markets,” said John Kinsey, a portfolio manager at Caldwell Securities in Toronto.

“If you have a 5-10 percent growth and a 4 percent dividend you’re looking at 10-11 percent or a little higher, and that’s not too bad in this kind of world.”

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