As the dust settles on the second quarter results of Canada’s big banks, analysts are reflecting on uneven reaction from the markets despite bumper profits across the sector.
“Canadian bank results were generally ahead of expectations during the quarter,” said Blackmont Capital analyst Brad Smith. Yet, he pointed out that “several minor misses combined with a perceived decline in earnings quality contributed to a broad-based bank stock sell-off in the post release period.”
As a whole, the banks reported earnings of C$5.0-billion, down 4% from the previous quarter but up 18% compared to the second quarter of last year. Total revenue of C$18.7-billion was up C$1.8-billion, or 9.6%, from C$16.9-billion last year.
Domestic retail banking was the best performer.
“Most banks reported good loan volume growth and some stability in net interest margins,” said Odlum Brown analyst Murray Leith.
“The major Canadian banks are maintaining strong underlying domestic personal and commercial business, including wealth management momentum this year,” said Lidia Parfeniuk, an analyst at Standard & Poor’s.
Another key trend was continued strength in credit quality.
“In aggregate, the banks have C$5.1-billion in non-performing loans (down from a peak of C$14-billion in 2002) and reserves of C$8.3-billion to cover problem loans,” said Mr. Leith. “The banks are well reserved,” he added.
The banks’ “outsized provisioning levels reflect a continuing cautious stance,” said Mr. Smith.
But with expectations so high for the banks these days, the solid second quarter could not prevent investors reacting with disappointment.
An “unforgiving” market “demonstrated a high sensitivity to variances from expected results and underlying earnings quality assessment,” Mr. Smith said.
Royal Bank of Canada (NYSE:RY) in particular suffered from “lofty expectations,” said Odlum’s Mr. Leith. RBC’s adjusted earnings per share of C99¢ fell short of analysts’ forecasts of C$1.01, prompting investors to drive the bank’s stock price down.
However, the downturn in banking stock prices likely does not reflect a solid outlook for earnings and profitability.
“At current valuation levels ...overweight positions in strategically advantaged, above-average–scale banks, such as buy-rated [RBC] and Bank of Nova Scotia (NYSE:BNS), are likely to deliver above-average investment returns,” said Mr. Smith.