TORONTO – Grappling with a perfect storm of economic and operating challenges, Canada’s biggest banks are expected to emphasize their efforts to rein in costs as they report their fourth-quarter earnings this week.
“They need a catalyst to grow earnings, and increasingly I think the focus is on expenses,” said Edward Jones analyst Jim Shanahan.
Bank of Montreal (TSX:BMO) and Scotiabank (TSX:BNS) will kick off the earnings parade on Tuesday, followed by Royal Bank (TSX:RY) and National Bank (TSX:NA) on Wednesday. CIBC (TSX:CM) and TD Bank (TSX:TD) will wrap up the quarterly reporting period on Thursday.
Analysts will be looking for signs of cracks stemming from continued low oil prices on the banks’ loan books. The first such indications of trouble began to crop up last quarter, when most of the lenders reported higher impaired loans — loans that are unlikely to be repaid in full — to companies in the oil and gas sector.
Despite the spike, the credit problems that have so far surfaced have proven to be manageable for the banks.
Analysts say the brunt of the pain is more likely to be on the consumer loan side — for example, when laid-off workers are unable to pay back their credit cards, consumer loans and mortgage debts.
However, analysts say it may still be too soon for those broader effects to be reflected in the banks’ results, as there is usually a lag period between job losses and loan defaults.
“We do not believe this is the quarter,” CIBC analyst Robert Sedran said in a note to clients, predicting that loan losses will start rising in 2016 and could climb by about 20 per cent on average.
Although analysts are anticipating a quiet quarter as far as credit is concerned, there are a number of other headwinds likely to weigh on the banks’ results.
Rock-bottom interest rates have reduced the profit margins that banks make on loans, overburdened consumers have become hesitant to take on more debt and sustained low oil prices have dampened the country’s economic growth, making it hard for the banks to generate new business.
All of that means growing revenue will be challenging for the lenders in the foreseeable future, and the institutions have been emphasizing expense control as their main lever to grow earnings.
Several of the banks have already announced that they will book restructuring charges in the fourth quarter, and Shanahan predicts there could be others, as well.
CIBC said in October it will record a restructuring charge of up to $200 million in the upcoming quarter, while National Bank announced plans to slash roughly 400 jobs, or 2.3 per cent of its staff, and book a $64 million after-tax restructuring charge.
TD Bank, meanwhile, said it was expecting to record a restructuring charge of similar magnitude to the one it saw in the second quarter, which was $337 million, or $228 million after tax.
Scotiabank analyst Sumit Malhotra says the banks seem to be highlighting head count and branches in their discussions around cost-containment.
CIBC, Royal Bank, TD Bank and Canadian Western Bank (TSX:CWB) all reported that their number of employees shrank in the third quarter compared to the same period in 2014, according to Malhotra.
“As an increasing proportion of banking transactions are conducted outside of the traditional physical footprint of the system, it stands to reason that the industry will reduce the infrastructure that was in place to service this business,” Malhotra said in a note to clients.
“To some extent this has been seen in the disclosure from the banks over the past year, as on an aggregate basis we see a reduction in the branch count of the sector (particularly outside of Canada) and a decline in the head count at four of the banks.”
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