Wealth management and capital markets expected to drive Canadian bank profits

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OTTAWA – Canada’s big banks are facing a tougher market for retail banking as the housing market slows and consumers look to reduce debt.

However, the wealth management and capital markets businesses are expected to pick up the slack as the country’s big financial institutions prepare to report their first-quarter earnings this week.

“I think wealth management is going to drive earnings within Canada,” said Stan Wong, director of wealth management and portfolio manager at ScotiaMcLeod.

Wong said there also has been a pickup in merger and acquisition deals that will help the investment banking operations at the banks.

“That might help boost some of the revenues on the capital markets side,” he said.

The country’s big banks are coming off record annual profits last year and big gains for their stock, but analysts have downplayed the prospects of a repeat performance.

CIBC analyst Robert Sedran said things may still not be great for the Canadian banks, but they are looking better.

“With the better tone to the capital markets during the quarter, combined with the fact that the first quarter of the year is typically a seasonally strong one for those revenues, we look for a solid start to the year from the group,” Sedran wrote in a note to clients.

Retail banking has been the bread and butter for Canadian banks in recent years, but it isn’t expected to continue to be where the growth will come from going forward.

Home sales in Canada on a month-over-month basis have slipped lower for five consecutive months and Sedran suggested mortgage growth is expected to be in the low single-digit range.

CIBC also forecast that non-mortgage consumer lending is expected to be roughly flat.

Barclays analyst John Aiken said while he does not expect a dramatic decline in earnings in the domestic retail business, the pressures are likely to persist.

“We anticipate further moderation in consumer lending volumes, but do expect some relative stability in overall margins.

“Lower levels of expenses may help lift earnings, however we continue to believe that significant positive operating leverage will be difficult to achieve in 2014 as revenue growth slows.”

Aiken suggested dividend increases may be possible for CIBC, Royal Bank and TD Bank with a possible stock split by CIBC, which has seen its shares pass the $90 mark.

Sedran expected increased dividends from TD Bank, Royal Bank, Scotiabank and CIBC.

National Bank will be the first of the big banks to release its first-quarter results when it reports after the close of markets on Monday. It is expected on average to earn $1.05 per share, according to the average analyst estimate as compiled by Thomson Reuters.

The Bank of Montreal (TSX:BMO) follows on Tuesday. Analysts on average expect a profit of $1.53 per share.

Royal Bank (TSX:RY), which is expected to report a profit of $1.43 per share, follows with its results on Wednesday, while TD Bank (TSX:TD) and CIBC (TSX:CM) report Thursday. They are expected to earn $1.04 and $2.15 per share respectively.

Scotiabank (TSX:BNS) reports March 4. The average estimate calls for a profit of $1.33 per share from Canada’s most international bank.

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