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Looking to U.S. financials for Canadian clues

The better-than-expected results for the U.S. banking sector in the second quarter may provide clues as to what investors can expect from Canada’s big banks when they report third quarter earnings next month. The recent challenges in capital markets for U.S. financials—most notably at Goldman Sachs where commodity trading revenue dropped significantly—will also plague Canadian financials, according to an analyst at Barclays Capital.

“The U.S. banks’ Q2 earnings results underscored a difficult earnings environment, with declining margins, modest asset growth, and challenged CMRev [Capital Markets Revenue],” John Aiken wrote in a note to clients.

“We anticipate the Canadian banks will experience similar challenges for their coming quarter.”

Although he expects loan losses to continue to improve at the big six, Aiken is particularly concerned that Canada’s big banks will continue to suffer from the slowing loan growth and margin pressure seen in second quarter results.

“The margin pressures and capital markets revenue challenges demonstrated by the U.S. banks’ Q2 results place a cap on the potential upside of the Canadian banks’ earnings,” Aiken says.

Barclays is not alone in highlighting eroding margins. In a recent interview with BNN, TD Bank's CFO Colleen Johnston, was straightforward in her outlook.

“We are seeing some increased competition,” she said. “Stable to slightly down is where I would be put margins going forward…with volumes starting to slow we are seeing banks price more competitively on both the lending and the deposit side and that does tend to have an effect.”
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