The sharp decline in the price of crude oil and the uncertainty it unleashed on the Canadian economy weighed on the big banks earlier this year, when share prices stumbled badly.
But as the banks get ready to report their fiscal second-quarter results this week, the threat from oil has largely gone quiet and share prices have begun to recover. Is there smooth sailing ahead?
The fundamentals are pointing to a ho-hum quarter, with analysts expecting overall earnings growth of just 4% over last year.
The big banks are firing on some cylinders, of course.
Capital-markets activity, in particular, is booming. According to some experts, companies listed on the Toronto Stock Exchange raised a total of $21.6 billion in equity financing from March through April, or nearly double the quarterly average seen over the past two years.
That translates into hefty underwriting and advisory fees, which is especially good for banks that have a relatively large exposure to capital markets, such as Royal Bank of Canada, Canadian Imperial Bank of Commerce and National Bank of Canada.
Trading and corporate lending are also performing well, and the banks should benefit from a weaker Canadian dollar, which will boost the value of their U.S. dollar sales and the value of foreign assets.
But the banks also lend to consumers, in a big way – and here, analysts are not seeing encouraging signs of growth.
Oil prices may have stabilized near $60 U.S. a barrel, but Alberta’s economy is reeling and the Bank of Canada is keeping a cautious outlook on the domestic economy.
While that translates into ongoing low borrowing costs, it also means that already indebted consumers have little incentive to tap banks for additional loans.
The other problem: The banks are struggling with low interest rates and a flat yield curve, undermining their ability to earn money on the spread between their borrowing costs and their lending revenue.
Another expert estimates that this net interest income probably declined by about 1.7% in the second quarter, from the first.
Mediocre earnings growth should be a welcome change to investors, who entertained all sorts of gloomy scenarios in the first quarter, when banks performed far worse than the broader market. These scenarios failed to emerge after most banks beat expectations with strong earnings and assured observers that their exposure to the energy sector was relatively low.
The question is whether investors will start to pay more attention to the longer-term outlook for the banks, which some analysts believe is challenging.
