The forecast for Canada’s biggest banks is bright thanks to U.S. tax reform and higher interest rates, but as they reported first-quarter results this week, domestic mortgage demand and the North American Free Trade Agreement could cloud the long-term outlook, analysts say.
Earnings estimates for the 2018 fiscal year are being revised upwards by some analysts to account for the impending bump from recent interest rate hikes and a U.S. corporate tax cut from 35% to 21% that took effect on January 1.
CIBC World Markets analyst Robert Sedran lifted the assumed average growth rate for the sector in fiscal 2018 from 7% to 9%, “turning what was already expected to be a good year into a better one.”
However, analysts said that the impact of stricter rules surrounding uninsured mortgages as of January 1 and tumultuous NAFTA negotiations will weigh on the Big Five banks.
“We believe short-term gains could fade shortly after earnings season as ‘the usual’ sector overhangs weigh on H1/18 performance, namely the housing market and NAFTA,” National Bank of Canada Financial Markets analyst Gabriel Dechaine told clients in a research note, as quoted by The Canadian Press.
“In other words: be nimble.”
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The Canadian Imperial Bank of Commerce and the Royal Bank of Canada entered the latest round of earnings for the quarter ended January 31 this week. Meanwhile, the Bank of Montreal and the Bank of Nova Scotia will report their fiscal first-quarter earnings on February 27. Toronto-Dominion Bank is expected to report earnings on March 1.
Last quarter, Canada’s five biggest banks earned more than $10 billion in collective profits on the surprising strength of the domestic economy. For fiscal 2017 as a whole, each of the five biggest Canadian lenders reported record annual profits for a collective total of $40.3 billion in net income, up nearly 13% from a year earlier.
“While Canada’s GDP is expected to ebb, we maintain that the broad-based strength suggests that the economic growth will continue to stay in positive territory, and by extension, bode well for the banks’ operating environment,” Barclays analyst John Aiken said.
However, Canadian lenders have cautioned that tougher mortgage rules introduced by the federal financial services regulator could present a headwind to its loan originations, ranging between 5% and 10%.
And while the fate of NAFTA remains uncertain, President Donald Trump’s tax overhaul is expected to provide a significant earnings lift in the future for Canadian lenders with exposure south of the border.