* Profit seen rising 7 pct at banks
* Bank of Montreal is first to report on Tuesday
* Housing slowdown, consumer lending to pinch growth
* Five of six banks expected to boost dividends
* Shares of top three banks at or near record highs
By Cameron French
TORONTO, Feb 24 (Reuters) -
Canada's banks made double-digit profit growth look easy last
year. But the going got tougher in the first quarter of this
fiscal year as a cooling housing market and a low interest-rate
environment started to sap the profits the Big Six earn on
Earnings are still growing, but modestly now and probably
not fast enough for bank shares to maintain the momentum that
pushed some of them to record highs, especially with U.S. banks
becoming more appealing to investors.
Five of the country's six major lenders are expected to
raise their dividends during the quarterly reporting season that
starts this week but even that might not lift their shares too
Shares of Royal Bank of Canada, the country's
largest lender, hit a record high on Tuesday, while
Toronto-Dominion Bank and Bank of Nova Scotia
are both trading within percentage points of record levels.
That's a little surprising. Data shows Canada's housing
market is cooling, while consumer indebtedness is still climbing
to new highs, suggesting that a period of de-leveraging is
looming for the banks' clients.
"I just think that at some point the music's going to stop
and we're going to see some sort of book value multiple
contraction commensurate with consumers de-leveraging," said Tom
Lewandowski, a St. Louis-based analyst at Edward Jones.
Forecasters doubt that the de-leveraging will result in a
housing crash similar to the one the United States experienced
five years ago, but the stress is already showing on bank
earnings, which are not expected to soon repeat the routine
double-digit percentage gains of past years.
RECOVERY NEXT YEAR
Year-over-year profit growth for Canada's six biggest banks
as a group should be around 7 percent, according to analysts,
who by and large see 2013 as a year of slower growth ahead of a
possible recovery in 2014.
"Domestic retail banking remains the core engine for the
Canadian banks in terms of cash capital generation, but in an
environment where expectations are broadly that consumer
borrowing will slow down, you have some very significant revenue
headwinds," Barclays Capital analyst John Aiken told Reuters.
Bank of Montreal will be first off the mark on
Tuesday, and is expected to report core profit of C$1.47 a
share, up from C$1.42 in the first quarter of 2012.
RBC is seen posting a per-share profit of C$1.32 vs a
year-before C$1.25, while TD is expected to earn C$1.93 a share,
up from C$1.86, and Scotiabank is seen earning C$1.25 per share,
up from C$1.15.
Canadian Imperial Bank of Commerce is expected to
post a profit of C$2.08 a share, versus C$1.97, while profit per
share at smaller National Bank of Canada is expected at
C$2.01, up a penny from the year-before quarter.
DEBT SOARS, HOUSING COOLS
Canada's household debt-to-income ratio hit a record high of
164.4 percent in the third quarter of 2012, while the
International Monetary Fund said last week that Canadian housing
prices were about 10 percent over-valued at the end of 2012.
On top of this, the current environment of low interest
rates means the banks earn a narrow margin on new loans, while
older loans that were at higher rates are renewed at lower ones.
While the profit-growth concerns, which have been bubbling
for about a year now, have not kept the banks' shares from
pushing higher, Aiken says that could change, particularly in
comparison with U.S. banks, which are expected to see strong
retail banking growth as they recover from the 2008 crisis.
"While we still see some upside potential in the
Canadian banks, we believe that they are likely to underperform
their U.S. peers, which are starting to see signs of retail
banking tailwinds," he said.
Shares of the six Canadian banks have risen between 3
percent and 18 percent over the past 12 months, with RBC and
Scotiabank leading the way with 12 and 18 percent gains,
respectively. That compares with a flat performance by the
S&P/TSX composite index.
CIBC World Markets analyst Robert Sedran sees a divergence
between the three largest banks - RBC, TD, and Scotiabank - and
their smaller rivals, as the larger banks' geographic diversity
and size give them more flexibility to weather the
Canada-specific revenue growth storm.
While all three banks have vast domestic retail bank
networks, they've also been expanding abroad aggressively.
RBC now has a large European wealth management arm and a
significant wholesale banking presence in the United States,
while TD has 1,300 U.S. branches, slightly more than it has in
And while Scotiabank's latest big acquisition was a C$3.1
billion deal for online bank ING Direct, it draws much of its
profit from its massive presence in Latin America, the
Caribbean, and Asia.
"Our stock selections are biased to banks that we believe
can grow revenue more rapidly while also more effectively
controlling cost. This leads to a bias to the largest three,"
Sedran said in a note.
He's not alone. Analyst ratings on RBC, TD, and Scotiabank
tend more towards buys and strong buys than BMO, CIBC, and
National Bank, according to Thomson Reuters I/B/E/S.
Despite the profit-growth concerns, the banks have been
steadily raising their dividends, and five are expected to hike
their payouts when they report first-quarter results.
This makes the stocks appealing when compared with the
meager results currently available from bonds or the uncertainty
associated economically sensitive resource stocks, observers
"Overall, I think they're still a pretty safe haven in these
rocky markets," said John Kinsey, a portfolio manager at
Caldwell Securities in Toronto.
"If you have a 5-10 percent growth and a 4 percent dividend
you're looking at 10-11 percent or a little higher, and that's
not too bad in this kind of world."