Are you looking for a stock?
Try one of these
While Canadian banks have continued to post record profits amid an uncertain global economic environment, some investors have been preparing themselves for an inevitable slowdown in earnings.
They'll be left waiting at least for another quarter, Barclays Capital analyst John Aiken said in a note to clients on Monday.
"When parsing the data, it does look like the Canadian banks are likely to report another solid quarter with their second quarter earnings," he says. "While observers, including ourselves, remain concerned about the impact that domestic household deleveraging will have on lending volumes, it looks like this theme may be delayed for at least another quarter."
Aiken's remark comes as Canadians are currently carrying a record level of debt and soaring home values in major cities such as Toronto and Vancouver have many economists warning of a potential housing bubble.
One concern for the banks is net interest margin (NIM), which is the spread they make from borrowing money and loaning it out to consumers and businesses. Margins have consistently decreased for the banks in recent years as interest rates moved lower, with the banks currently reporting an average NIM of about 2.5 percent.
"We anticipate that NIMs will likely remain under pressure amidst the prolonged low interest rate environment, and heightened competitive pricing, although we do not anticipate that the recent mortgage wars will have a material impact," he says.
Canadian banks recently launched what was dubbed "mortgages wars," offering consumers 4-year mortgage rates of 2.99 percent.
Banks will post lower trading revenues, as they benefited from a strong January in their first-quarter earnings, Aiken says. But he adds that a higher number of fees from M&A activity could help offset that slowdown.
Aiken says that because leveraged consumers and economic headwinds will make it difficult for them to increase their revenues, the banks will continue with their cost-cutting efforts.
"In this environment, managing expenses will remain critical in maintaining profitability," he says.
Aiken has lowered his price target for the Bank of Nova Scotia (BNS-T) to $51 from $53, for CIBC (CM-T) to $78 from $80, and National Bank (NA-T) to $78 from $79.
“While it largely reflected housekeeping, we lowered BNS’ and NA’s targets because of our perceived risk of volatility in earnings over the next few quarters. This volatility, in our view, merits lower valuation multiples,” he tells BNN. “For CM, the market has been unwilling to give it value for the operating leverage that it has generated. As this will likely slow in the latter half of 2012, the likelihood of it garnering a lift declines and, as such, we lowered our target multiple.”
He has maintained his price target for Bank of Montreal (BMO-T) at $60, Royal Bank (RY-T) at $57 and TD Bank (TD-T) at $87.
The banks kick off their earnings season on May 23, beginning with Bank of Montreal.