Canada’s next bank earnings season is still greater than a month away, but early indications suggest solid results are on the way, says Darko Mihelic, analyst at RBC Capital Markets.
“So far, we see generally positive trends for domestic loan growth, underwriting and advisory activity, no signs of credit deterioration, and capital ratios developing in advance of Q2 Canadian bank results,” Mihelic said inside a note to clients.
“If the banks were seriously interested in cost initiatives in quarter, the set-up looks good for Q2 earnings.”
Mihelic noted that residential mortgage growth for the large Canadian banks has been modestly accelerating in the last several months, with?secured domestic property loans increasing by 4.3% in February.
Interest rates, furthermore, have increased on a quarter-to-date basis, that ought to provide support for net interest margins within the segment, he explained.
The RBC analyst also believes income from investment banking operations fees is “apt to be robust,” and doesn\’t see any “concerning signs” on credit quality.
“We are currently forecasting a 6% QoQ average rise in loan loss provisions for our Canadian banks coverage; all else equal we believe our estimates are reasonable,” he said.
All told, Mihelic believes current trends support the recent rally in bank stocks, but warned investors about getting too complacent.
“We caution the Canadian Bank index has shown a very high correlation (75%) to oil prices since mid-June 2014 and we continue to think that Canadian bank valuations will be impacted by macro factors and still see risks to earnings as ‘elevated’ within the near term,” he explained.