Nichola Saminather

TORONTO (Reuters), – Canadian banks will report higher earnings in the first quarter than a year ago due to lower provisions for credit loss and improved loan demand. However, rising costs remain a concern for investors.

Analysts believe Canada’s Big Six banks (Bank of Canada, Toronto Dominion Bank and Bank of Nova Scotia), Royal Bank of Canada, Toronto Bank of Canada, Bank of Nova Scotia Bank of Canada, Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada) will see an average of 6 percent increase in adjusted earnings per share during the three months to January.

However, earnings can be lower than a previous year if taxes and provisions are not taken into account. In a note, CIBC Capital Markets analysts said that expense growth could outpace revenue expansion. They also predicted that capital markets units would make a lower contribution this year due to last year’s strength.

Royal Bank launches results reporting starting on Thursday.

Canadian banks reported record profits during the pandemic. Strong mortgage lending, trading, and deals activity offset a decrease in credit demand. With the end of central bank and restrictive government policies, earnings drivers are beginning to shift.

Rob Colangelo (Vice President and Senior Credit Officer at Moody’s Investors Service) stated that “Mortgage Growth will remain strong. It’s not surprising there.” There is some growth in other types of lending such as auto and credit cards.

Colangelo stated that credit-loss provisions will continue to trend lower as banks release capital to cover for impaired loans.

However, expenses remain the most uncertain for this quarter due to tight labor market.

Philip Petursson is chief investment strategist for IG Wealth Management. He said that there was a lot more movement in the financial sector and that a lot it was driven by wages. “I am curious about the impact that this has on banks.”

This phenomenon has spread to other parts of the world, as major Wall Street banks raise pay and bonus payments in order to retain and attract talent, especially those working in investment banking.

Planned business investments and a rising inflation could lead to increased cost pressures. Revenues remain challenging during this quarter.

Analysts from CIBC forecasted a 1% increase in year-on–year revenue growth for the quarter. However, they noted that any central bank interest rate increases that may have helped are not yet happening.

In a note, they stated that inflation can be offset by higher interest rates. Rate benefits will be in the future, while inflationary effects are already happening. At its March 2 meeting, the Bank of Canada was widely viewed as raising rates.

It is possible that a much-anticipated increase in net interest margins did not materialize during this quarter. Even though fixed rates for mortgages rose, this was slower than the rate at which short-term rates are rising. Short-term rates affect banks’ borrowing costs. They have also risen in anticipation central bank rate rises.

Petursson noted that the Canadian bank index has risen 115% over its March 2020 peak, while the Toronto stock benchmark gained 89%. This means there are greater downside risks for bank shares.

He stated that “if banks surprise me to the upside I’m less convinced we will experience a substantial jump in stock performance.” If earnings disappoints, you could experience a more severe hit to the upside.