Bloomberg News

Bank Profit Growth Rises on Business Loans: Corporate Canada

May 22, 2012

Canadian banks, including Royal Bank of Canada (RY) and Bank of Montreal, will post higher profit in the fiscal second quarter as a firming economy fueled loans to consumers and businesses, analysts said.

The country’s banks will boost earnings per share before one-time items by an average of 5 percent in the period ended April 30, said Sumit Malhotra, an analyst at Macquarie Capital Markets in Toronto. That’s up from a 1 percent increase on that basis in the first quarter. Bank of Montreal, the fourth-biggest bank by assets, reports results tomorrow.

Even as policy makers warned against the dangers of too much household debt, Canadians took advantage of record-low interest rates to increase borrowing, bolstered by the largest two-month employment increase in more than 30 years.

“Lending isn’t slowing down; lending is actually accelerating,” Barry Schwartz, a portfolio manager at Baskin Financial Services Inc. in Toronto, said in an interview. Baskin manages C$400 million ($392 million), including bank shares. “I think that’s going to be a theme and a trend that’s going to continue.”

Canada’s banks, ranked the world’s soundest for the past four years by the Geneva-based World Economic Forum, reduced mortgage rates to historic lows between January and March, prompting some consumers to take out fixed-rate loans at lower rates. Overall bank lending increased at an annualized pace of 3.1 percent for the three months ended March 31, according to Brad Smith, an analyst at Stonecap Securities. That compares with a trailing 12-month increase of 7 percent, he said.

Slowing But Growing

“The banks are slowing, but still growing,” Robert Sedran, an analyst at CIBC World Markets in Toronto, said in an interview. “While the growth rates are not eye-poppingly large, there still is some progress being made.”

Household debt driven by mortgage credit expansion is the “main threat” to risk profiles of Canadian banks, Fitch Ratings said yesterday in a report. The six largest banks had C$912 billion of exposure to residential mortgages and home equity lines of credit at the end of January, the ratings company said.

Net interest margin, the difference between what a bank charges for loans and pays in deposits, will be flat to down for most of the banks this quarter, according to a research note by Mario Mendonca, an analyst at Canaccord Genuity.

“I don’t think margins are going to collapse,” Mendonca said in an interview. “But if there’s one area I’m afraid I’m wrong, it’s that the mortgage competition had a greater effect than I expected.”

Toronto-Dominion Bank (TD), Canadian Imperial Bank of Commerce are among lenders that have said they will slow the rate of expense growth this year, expecting a decline from record levels of domestic consumer-bank earnings.

Bank of Montreal

“That’s what the banks do,” said John Kinsey, who helps manage about C$1 billion at Caldwell Securities Ltd. in Toronto, in an interview. “Other than raising fees, they cut costs through staffing in times like this.”

Mendonca said the banks will also cut projects that don’t “really involve anyone who meets clients,” such as administrative systems and cross-selling projects.

The Standard & Poor’s/TSX Composite Commercial Banks Industry Index (STCBNK) that tracks Canada’s eight traded banks has risen less than one percent this year, compared with a 3.8 percent decline for the benchmark S&P/TSX Composite Index.

Bank of Montreal (BMO) is expected to post profit before items of C$1.35 a share, an 8 percent increase from a year earlier, according to Malhotra.

RBC, TD

Royal Bank of Canada and Toronto-Dominion Bank, Canada’s two largest banks, are scheduled to report May 24. Royal Bank may have profit of C$1.20 a share, up from C$1.12 a year earlier, Malhotra said. Toronto-Dominion is expected to report profit of C$1.82 a share, up from a year-earlier C$1.63.

Bank of Nova Scotia, the third-largest bank, is expected by Malhotra to have profit of C$1.16 a share when it releases results May 29. That’s down 4.9 percent from C$1.22 a year earlier.

CIBC and National Bank of Canada, the fifth- and sixth- largest banks, are scheduled to report results May 31. CIBC will post adjusted profit of C$1.88 a share, a 2.7 percent increase, while Montreal-based National Bank will post C$1.90 a share, a 6.7 percent increase, according to Malhotra’s estimates.

Laurentian Bank of Canada and Canadian Western Bank (CWB), the two smallest banks of the group, are scheduled to report results June 6 and 7. The two banks, as well as National Bank, are projected to raise their quarterly dividends, according to Bloomberg Dividend Forecasts.

“They feel that this year is going to be good enough that they could raise the dividend and return that money to the shareholders,” said Caldwell’s Kinsey.

To contact the reporters on this story: Sean B. Pasternak in Toronto at spasternak@bloomberg.net; Doug Alexander in Toronto at dalexander3@bloomberg.net

To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net; David Scheer at dscheer@bloomberg.net.


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