Q4 Pre-Announcement: Silence Doesn't Bode Well for Canada's Other Three Banks

Nobody was surprised by the fact that Royal Bank (RY) pre-announced fourth quarter earnings after Toronto-Dominion Bank (TD) and Bank of Nova Scotia (BNS) did so last week. But what is raising some eyebrows is the lack of pre-announcements by the remaining the of Canada’s Big Six banks.

Dundee Securities analyst John Aiken told clients:

We cannot believe that arguably three strongest banks operationally incurred significant charges in the fourth quarter while Bank of Montreal (BMO), CIBC (BCM) and National Bank of Canada [NA-PM.TO] were unscathed.

He noted that the deterioration in credit quality Royal is feeling from its U.S. operations is quite negative for the other banks, including BMO, TD and Scotia. As a result, the analyst recommends investors take shelter in those banks that have already pre-announced. He said, “we do not believe that no news is good news in this environment.”

Mr. Aiken said a few key points stick out for Royal. The bad news is that credit is deteriorating faster than expected, with an increase in provisions blamed on the bank’s U.S. portfolio. On the positive side, Royal appears to have been able to earn through this and will likely post core earnings that will beat the Street, he told clients.

When it comes to valuations in the current market environment, that fact is better than the unknown for Royal, he added, upgrading the stock to “neutral” from “sell.”

Mr. Aiken said core earnings look like they will be around C$0.91 for the quarter, below consensus at C$0.97. But until the full financials are released on December 5, the market won’t know what Royal’s true earnings strength and quality really are.