Canadian banks seen delivering upside surprise amid low expectations

financialpost.com:

The second quarter was tough for Canadian banks, with higher provisions for potential credit losses and escalating costs for employees and technology eating into earnings. But the extent to which the trouble spills over into third-quarter results, which the banks will report beginning Aug. 24, has sector watchers divided.

John Aiken, a bank analyst at Barclays, believes the pessimism, which led many to rein in forecasts for the three-month period ended July 31, may have gone too far.

“With consensus estimates lowered coming out of Q2 (and heading into Q3), we believe the banks could surprise to the upside, posting better than expected third-quarter earnings and continuing to fuel valuations ahead of the long-awaited … but now only potential recession,” the analyst wrote in an Aug. 21 note to clients.

Aiken said Canada’s largest banks will fight hard to keep costs in line in order to maintain margins, and he noted signs of improvement in capital markets activity during the quarter, despite it being a seasonally slow period for deals.

Loan growth, while moderating, likely continued in the third quarter, he said, with higher interest rates buoying net interest income — a measure of revenue generated from a bank’s interest-bearing assets such as mortgages and commercial loans against the expenses associated with paying interest, such as to depositors.

His reasoning is based in part on the Bank of Canada’s decision to pause its rate tightening cycle during a portion of the third quarter before resuming in June, which lent some stability to commercial bank deposit rates and funding costs while asset portfolios continued to reprice at higher rates.

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