Canadian Bank Earnings May Be Even Rosier
by Craig on 03/11/09 at 12:55 pm
The Canadian banks are not set to report earnings until late November and early December, but the stars are aligning for a strong finish to their fiscal years. This view, which we originally wrote on Oct 24 in our Buying the Banks Ahead of Earnings
, received further support as the bank owned investment houses finished their fiscal years. In today’s Globe and Mail, Andrew Willis writes - ”the country’s six biggest brokerage houses have put fiscal 2009 to bed in grand style, recording the best 12 months they’ve ever seen in equity underwriting.” Almost $50 billion worth of stock sales occurred during the past year with Royal Bank’s RBC Dominion topping the list, followed by Scotia Capital, TD Securities, BMO Nesbitt Burns and CIBC World Markets. Barrick Gold’s (TSX:ABX) $4.4 billion stock sale to cancel many of their existing gold hedges helped.
But it won’t be just capital markets helping bank earnings. While there are many factors at work in a bank’s quarterly earnings report given their size and breadth of operations, it seems the steeper the yield curve the better. Comparing the slope of the yield curve based on 10-year government bonds and 3-month T-bills, the steeper the curve the better the quarter-over-quarter earnings growth of the banks (chart). Currently, with T-bills yielding 0.29% and 10-year government bonds yielding 3.43%, the curve is very steep with a slope of over 3%. Since 1993 when the slope is over 3 percentage points only once was there negative earnings growth (-2%) and the average earnings growth was positive and in the double digits. Given the slope, we should see some decent earnings growth next quarter from the banks.
Also encouraging, is while the economy is not completely out of the woods, things have continued to improve over the past few months. As things improve the banks may take lower reserves for loan losses, which too would help fuel earnings growth. Despite all of this, earnings estimates for the banks have not budged in the past four weeks, according to data compiled by Bloomberg. Based on these consensus estimates, the group is expected to have roughly flat earnings.
Trading Ideas – Buying the Canadian Banks
We remain confident the banks are going to post some impressive earnings numbers starting at the end of November.
Digging a little deeper into last quarter’s results, Bank of Montreal (TSX:BMO; $50.08), Toronto Dominion Bank (TSX:TD; $62.56), Bank of Nova Scotia (TSX:BNS; $45.82) and Canadian Imperial Bank of Commerce (TSX:CM; $57.25) appear to have greater exposure to Net Interest Income. Although this does fluctuate from quarter to quarter and Royal Bank (TSX:RY; $50.45) was at the top of the league tables for amount raised by their brokerage division.
From an ETF perspective the iShares CDN Financial Sector Index Fund (TSX:XFN; $21.70) is weighted 69% towards the big six banks providing a little more diversification.
