HSBC Canada Results Bode Well for CIBC, National Bank

| About: HSBC Holdings (HSBC)

HSBC Bank Canada’s second quarter results were released on Friday. Since it is frequently used as a comparable for upcoming Canadian bank earnings, HSBC’s results warrant a closer look.

Net income was up 34% sequentially, with half of the gain coming from a 22% decline in credit loss provisions and the other half from gains on available-for-sale securities.

Securitization revenue declined by 90% in the quarter, which foreshadows an anticipated decline for Canadian banks in their third quarter results, according to Blackmont Capital analyst Brad Smith. He believes the pick-up in securitization revenue provided an additional 14% to the domestic banks’ earnings in the second quarter.

However, capital markets fees that were up 31% sequentially due to increased underwriting activity and fixed income trading revenues served to offset this.

Gross impaired loans at HSBC declined 6% for the quarter. Mr. Smith estimates that net write-offs rose 75% seqentially, “creating a less than perfect picture on credit quality over the quarter.” However, he noted that net write-off growth tends to lag impaired loans.

Overall, the analyst considers the results fairly positive given strength in net interest margins and capital markets fees, as well as management’s ability to reduce impaired loans during the quarter. Mr. Smith said the healthy results should be especially positive for more Canadian-centric banks such as CIBC and National Bank.