Canada's biggest banks are expected to show resilience as they report third-quarter earnings this week in the face of higher interest rates that are pressuring the country's housing market.
While the quarterly results are unlikely to shock the market with any major surprises, investors will be closely watching the sector for any signs that the country's financial institutions are feeling the squeeze, suggest analysts.
"To be sure, they are not thriving," wrote Rob Sedran, a bank analyst at CIBC World Markets in a note.
"Loan growth is slowing as expected, margins are stabilizing,
Big banks' Q3 results expected to show impact of rising interest rates
but the pressure remains, and the housing market — well, we are growing a little tired of discussing the risks in the housing market — but suffice to say that the overhang is there."
Outperformed TSX for 8 quarters
Indeed, it has been a tough few quarters for Canada's banks, which weathered the economic downturn with surprising resilience but some ran into other challenges with their trading divisions and U.S. operations.
Even so, the banks have managed to outperform the TSX over the past eight quarters and increase dividends by 14 per cent, said Sedran. Whether they can boost that momentum remains to be seen.
"We believe that significant growth in earnings will be a challenge," said Barclays analyst John Aiken in a note.
There are "few catalysts that could either meaningfully increase consensus estimates or cause the market to suddenly be more willing to pay up for the banks' moderating earnings growth."
A recent study by the Fitch ratings service said the big banks could likely withstand a moderate-to-severe housing downturn. The report said each of the big banks has an equity ratio well above what is required under the new Basel III requirements, which set out key measures of a bank's health and ability to endure future economic downturns.
Too much emphasis is being placed on the negative impacts of rising interest rates on the banks, and not enough on how the banks could benefit from higher rates, said Gareth Watson, vice-president of investment management and research at RichardsonGMP.
While higher interest rates can mean that fewer Canadians will seek out loans for mortgages, other divisions of banking operations can benefit, he said. For example, the banks could strategize to use cash on their hands, and higher rates, to their advantage.
"These banks have known that this situation was going to be coming for a long time," Watson said.
"They've had time to prepare, and for that reason, I don't think you're going to see a huge abrupt impact to earnings just because you might see a rising interest rate environment."
BMO will be 1st to report
Earnings reports are squeezed into a schedule that's tighter than usual this quarter, likely motivated by the Labour Day holiday on Sept. 2.
First to report will be Bank of Montreal and Scotiabank on Tuesday morning. Consensus expectations from analysts are for BMO to report $1.52 earnings per share while Scotiabank is pegged at $1.30 per share.
On Thursday, the rest of the major banks issue their results. Analyst expectations are for CIBC to report earnings of $2.15 per share while Royal Bank is expect to post $1.38 per share.
Last month, TD Bank gave investors advanced notice that it expected to book an after-tax loss of between $240 million to $290 million during the quarter as it recognized claims associated with recent severe flooding in Alberta and the Toronto area.
Analyst expect TD to report $1.55 earnings per share.
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