Interest rates

Will higher interest rates be enough to sustain profits?

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Canada’s five major banks are expected to release their second quarter results this week.

Bank of Nova Scotia (NYSE: SNB) and Bank of Montreal (New York Stock Exchange: BMO) must report on May 25 before open market, while the Toronto-Dominion Bank (NYSE: TD), Royal Bank of Canada (NYSE: RY) and the Canadian Imperial Bank of Commerce (NYSE: CM) will publish their figures on May 26 before the market opens.

Earnings in the top five are expected to fall on average as banks have likely been weighed down by higher spending and loan loss reserves and lower investment bank revenues, despite strong loan growth and expansion margins as interest rates rose. A surge in inflation and stock market sell-offs will also weigh on earnings, Reuters said.

Consensus estimates for banks are given below:

Canadian T1 Banks

As historically low interest rates during the coronavirus pandemic weighed on net interest margins, they boosted demand for mortgages. Strong equity markets and business activity propelled the capital markets and wealth management divisions.

Government stimulus programs have kept loan losses low.

Falling equity markets have reportedly weighed on assets under management and investment banking activity has also slowed dramatically, Steve Belisle, portfolio manager at Manulife Investment Management, told Reuters.

Shortages in the labor market will also be a challenge according to analysts at National Bank Financial, with recent announcements by banks of wage and bonus hikes. They also noted factors such as slower asset growth potential that outweigh the margin expansion.

Investors suggested banks could see lower loan loss reserve releases or higher provisions in the second quarter in response to higher risks.

However, SA contributors were broadly bullish on the top five banks, with one noting that the SNB’s credit quality is strengthening with fewer write-offs and a lower credit loss provision. Wolf Report said it is confident that banks will benefit from a rising interest rate environment.

Jonathan Weber suggested that TD has the edge over RY due to even more favorable dividend metrics and fundamentals, but both banks look good on paper. Meanwhile, Mark Dockray has suggested keeping CM, with a dividend yield at the high end of its peer group.