Canadian banks Q2 preview: Earnings growth and dividends

Second quarter earnings from Canadian banks are all expected to positive, however they will likely demonstrate a broad performance range and dividend hikes should be limited.

Bank of Montreal kicks things off on May 23 and the results will run until to June 7.

RBC Capital Markets analyst Andre-Philippe Hardy estimates core cash EPS will rise 7% year-over-year for the sector as a whole, with Bank of Nova Scotia expected to come in at the low end at 1% and BMO at the high end at 12%. His forecasts are 2% to 3% higher than consensus estimates.

“We expect year-over-year earnings growth headwinds this quarter will include slow (but still positive) consumer loan growth and margin pressure, while positive drivers will likely include strong commercial loan growth and he positive impact of acquisitions,” Mr. Hardy said in a research note.

The analyst also forecasts dividend hikes from three banks: National Bank (by 4¢ to 79¢), Laurentian Bank (by 3¢ to 48¢) and Canadian Western Bank (by 1¢ to 16¢).

Mr. Hardy anticipates provisions for credit loss will rise slightly on both a quarterly and annual basis at three banks. However, he does not expect credit to be as important a driver of earnings growth organically.

He noted that acquisitions at Bank of Montreal (M&I), Scotiabank (Banco Colpatria and other small Latin acquisitions) and Toronto-Dominion Bank (MBNA Canada) are expected to keep provisioning growth rates higher at those banks than their peers this quarter.

“Offsetting some of these positives is the negative impact of the IFRS transition, which is being phased in over five quarters,” the analyst said.

He sees Tier 1 common ratios ranging from 8.9% at TD Bank to 10.8% at CIBC), and Tier 1 ratios ranging from 11.8% at TD Bank and BMO to 14.2% at CIBC.
Mr. Hardy’s favourite bank stocks remain TD Bank, Scotiabank and Canadian Western Bank.

“We believe that TD’s above-average revenue growth in Canada and the U.S. will continue in 2013, which could be “valued” even higher in a slower domestic growth environment and an improving U.S. banking environment,” he said.

“For Scotiabank, we believe its growth prospects and valuation multiple should benefit relative to domestic-focused peers from having growth opportunities outside Canadian retail banking. We like its consistent strategy and execution, the greater growth potential of its International Banking arm versus purely North American banking franchises, and the improved wealth management platform.”

“Canadian Western Bank’s higher exposure to commercial lending and to Western Canada will support a better earnings growth profile than many peers in 2012 and 2013, especially when margin pressure moderates in our view.”

[BusinessFinancialPost.com]