Paul Bagnell

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After navigating the twin perils of low crude oil prices and stretched real estate markets in 2016 – and posting an aggregate gain in share prices of 26 per cent along the way – things are looking much brighter for Canada’s big banks these days.

When the Big Six begin reporting their first-quarter earnings this week, we will likely see profit growth accelerate modestly as higher crude oil prices, wider interest-rate spreads and a robust trading environment all flow to the bottom line.

For the first time in years, there seems to be a bit less to fret about when it comes to the banks and threats to their profit growth. “This feels a bit weird,” admitted analyst Robert Sedran of CIBC World Markets, in a recent report.  While Canada’s housing market and household debt levels still warrant caution, he noted, things like the financial crisis, the European debt crisis, record low interest rates and the oil price crash are now in the rear-view mirror.  Sedran thinks this set of quarterly earnings reports will set the stage for a path of profit growth at the banks that will run through the end of 2018.

U.S. banks have all reported their fourth-quarter numbers, and the results were impressive. The U.S. banks operate on a calendar year, meaning their fourth quarter includes two months – November and December – of the Canadian banks’ fiscal-year first quarter, which ended on the last day of January.

And the Canadian unit of British banking behemoth HSBC reported results on February 21. There too, the signals were promising. HSBC Canada reported stable net interest income, a rebound in trading revenue and lower expenses – all of which are likely to feature in the results from the big banks. (HSBC Canada also operates on a calendar-year basis).

So here’s what to look for when the big banks report their earnings.

Solid earnings growth: The days of consistent double-digit earnings growth are still a distant memory, but the banks will likely improve on last year’s low single-digits performance. Estimates compiled by Thomson Reuters show analysts expecting mid to high single-digit gains in earnings per share in the first quarter, compared to the first quarter of fiscal 2016. The sector-wide advance is expected to be 6.2 per cent. Toronto-Dominion Bank is expected to lead the pack with 9 per cent EPS growth.

Dividend hikes: Expect dividend increases from Bank of Nova Scotia, Royal Bank of Canada and Toronto-Dominion Bank. John Aiken, an analyst at Barclays Capital, refers to the expected TD dividend boost as “supersized,” because TD has shifted to a pattern of once-a-year dividend increases. Its quarterly dividend is expected to move to $0.58 per share from $0.55. Scotia and Royal tend to do it every other quarter. Scotia’s dividend is expected to be raised to $0.76 from $0.74, and Royal’s is estimated to go to $0.85 from $0.83.

Strong capital markets performance: The U.S. election seems to have changed everything, and all that volatility in markets – equity, fixed income, currency and commodities – is gold for traders at the banks’ capital markets divisions. This can be a very difficult line to forecast, but it’s a safe bet capital markets revenue and profit for the banks will be strong. Sedran expects to see capital markets revenue rise three per cent on a quarter-to-quarter basis, and a healthy 11.7 per cent compared to the first quarter of fiscal 2016. The U.S. banks, he notes, reported solid capital markets numbers for their December-ended fourth quarters.

Expense control: Low interest rates mean the banks must be strict in controlling costs, and analysts expect them to deliver another tightly managed quarter on the fixed-expense line. Costs – or “non-interest expenses” in bank jargon – are expected to fall slightly from fourth-quarter levels and increase by about 2.5 per cent from the first quarter of fiscal 2016. That’s significantly less than the expected pace of EPS growth.

Stabilizing loan losses: The effect of improved crude oil prices is huge here. With West Texas Intermediate crude having traded up to US$50-plus since the OPEC production cuts of late last year, strains on the energy loan books will continue to ease.  And that will flow through to consumer loans in places like Alberta and Saskatchewan. Aiken says he expects “energy-related credit concerns will continue to ebb” in the quarter.  As for consumer loans, Aiken says Canada’s recent job-growth performance – while dominated by part-time job creation - continues nonetheless to be “supportive” of the banks’ loans to individuals.   And the most recent numbers from the Canadian Bankers Association, he notes, show mortgage arrears remain stable.

Stronger margins: The yield curve has steepened since the U.S. election, and that is expected to deliver a boost to net interest margins at the banks, which borrow in the short end of the curve and lend at the longer end. Sedran told clients recently to expect Canada’s banks to “experience some benefit this quarter from the Federal Reserve rate hike and generally higher longer-term rates.” The benefit should be stronger, he said, for banks like TD, BMO and Royal, which each do business in the U.S.

And here is what to look for at each of the individual banks:

Royal Bank of Canada (February 24): This bank can be a capital markets powerhouse when the trading environment is right – and the environment was very right in the November-January quarter. Expect strong numbers from the RBC traders. And a dividend hike is expected.

Bank of Montreal (February 28): Performance at its big U.S. banking operation will be the key. Listen for what executives have to say about the appetite for loans among business clients in the U.S. Midwest.  

Bank of Nova Scotia (February 28): Profit from the international banking segment is always crucial, but even more so this time with the dramatic erosion in the value of the Mexican peso since the election of Donald Trump. Scotia operates one of the largest banks in the country. A dividend increase is expected.

National Bank of Canada (March 1): Retail banking revenue growth has been below average at National for the past four quarters, notes Sedran. With the Quebec economy having added more full-time jobs than all other provinces combined over the past 12 months, that could change.

Toronto-Dominion Bank (March 2): The focus remains on TD’s huge U.S. retail banking network, which had a strong quarter in the August-October quarter.  A dividend hike is expected.