In the recent past, the slump in oil prices had guided markets over an extended period. The specter of the oil slump has receded now and this may well benefit several sectors. Fiscal second-quarter results of Canadian banks, scheduled for release this week, may well be among them.
Bank Fundamentals to Take Centerstage?
According to an analyst at The Bank of Nova Scotia BNS, high levels of volatility experienced by Canada’s bank stocks in the early part of the year has reduced significantly. Much of that volatility can be attributed to the slump in oil prices which occurred at that time.
This is why Canada’s banks may be well placed at this point, given that the threat from the oil price plunge has receded. Some market watchers believe second quarter earnings numbers will focus on bank fundamentals. At the same time, these very fundamentals indicate that underwhelming numbers are in store. Analysts believe that year-over-year growth may only be a shade higher than 4%.
Market Activity, Business Lending to Deliver Boost
One major factor working in favor of banks is the increase in market activity. Stocks listed on the Toronto Stock Exchange managed to raise $21.6 billion during March and April, according to the same analyst. This is twice as much the quarterly average recorded over the last two years.
This implies that banks will gain from the higher volumes of advisory and underwriting fees. Such an increase will prove especially beneficial to those banks whose exposure to capital markets is relatively higher. This includes the likes of Royal Bank of Canada RY, Canadian Imperial Bank of Commerce CM and National Bank of Canada NTIOF.
Other areas of strength are corporate lending and trading, which have delivered good performance. The decline in the country’s currency will also help banks, pushing up the value of foreign assets as well as that of sales in terms of U.S. dollars.
Causes for Concern
However, consumer lending remains an area of weakness and shows a few indications of growth. For instance, despite the fact that oil prices have firmed, the economy of the country’s western province Alberta continues to suffer. The Royal Bank of Canada maintains a cautious outlook on Canada’s economy.
This means that borrowing costs have declined. However, it also means that growth in loans will remain low. Additionally, a flatter yield curve and low interest rates means that banks are suffering from the negative impact of a low spread between revenue from lending and associated costs.
According to one estimate, net interest income has fallen by nearly 1.7% between the first and second quarter. At the same time, the reduction in borrowing costs means provisions for loan losses is expected to increase by only 2%.
Long Term Prospects
Despite such concerns, investors will be pleased with even sluggish earnings growth for the second quarter. Following the disappointing performance of bank stocks in the first quarter relative to the broader market, they would probably have been expecting grimmer news.
At the same time, prospects for domestic retail banking remain gloomy. This is because the country’s household debt as a proportion of disposable income remains at all time high levels. Such levels of debt mean Canada’s households remain vulnerable to external shocks at this point.
In such an environment, it may be prudent to focus on the likes of National Bank and the Bank of Nova Scotia. This is because they derive a relatively lower percentage of their earnings from domestic retail operations.
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