Canada’s brawniest banks are upping the ante in the mortgage wars amid slowing progress and national housing sales at lows not seen in several years, but analysts say natural estate market woes won’t dent lenders’ earnings, just yet.
The banks, which are set to upon reporting their second-quarter results this week, are expected to surrender “solid” earnings, said Darko Mihelic, an analyst with RBC Brill Markets.
Unemployment rates have stayed low and wage growth has for the most part remained strong “which should be supportive for the Canadian housing peddle,” he said.
However, Mihelic said that he still sees quarters activity and prices as soft and the downside risk as real.
“We would twin to see a few more months of data to better understand the extent of the impact that new changes to the housing/mortgage market have had on residential mortgage evolution and the broader economy,” he said in a recent research note.
Cooling homes market
CIBC is the first of the big banks scheduled to report its latest concludes with data out Wednesday, followed by TD Bank and Royal Bank on Thursday. Scotiabank is set to crack its results on May 29, with BMO and National Bank on May 30.
Concern over the purl effect of a cooling housing market on Canada’s Big Six lenders has been mounting in new tighter mortgage lending guidelines, rising interest rates and for a bonuses introduced by provincial governments, such as taxes on non-resident buyers.
In any event, analysts are expecting improvement on other fronts, such as efficiency outdistances and better margins on the back of three Bank of Canada rate hikes in minute than one year, to help fuel the banks’ earnings in the quarter.
“This is not to intimate that everything is coming up roses, but there are enough flowers to conceal the odd weed in the garden,” said CIBC analyst Robert Sedran in a note to customers. He is forecasting the banks’ earnings per share to grow nine per cent, year all through year, while Mihelic is expecting an eight per cent bump.
Silence, the tail end of the banks’ second quarter, which ended April 30, saw double-digit year-over-year sacks in both national home sales activity and average sale charge, according to the latest figures from the Canadian Real Estate Federation. CREA blamed a new stress test as of Jan. 1 for uninsured mortgages, which has made it harder for some borrowers to moderate, for the majority of the drop.
Residential secured lending represents, on average, 49 per cent of reckon net loans for Canada’s Big Six banks, but mortgages are less profitable than some of the lenders’ other monetary products, said Sedran.
“The fact that mortgages carry a shame margin makes a slowdown in growth less impactful than one muscle think,” he said in a research note last week.
‘Very tractable headwind’
Meanwhile, Sedran adds, other factors are helping “gong -buoy earnings growth” for the banks, such as double-digit commercial loan proliferation, ongoing efficiency improvements, U.S. corporate tax cuts, and expansion of net interest latitudes, which is the difference between the money they earn on the loans they make to appear and what they pay out to savers.
“Particularly when one considers that banks are in in reality diversified financial services conglomerates rather than pure banks (and break up by geography as well), we believe that slowing mortgage growth wishes prove to be a very manageable headwind to earnings growth, as not only mortgage cultivation has been driving the sector,” Sedran said.
Still, Canadian banks are upping the ante in the action for mortgage market share with deep discounts to their changeable rates.
A rise in government bond yields have prompted the lenders to improve their posted five-year fixed mortgage rates, reflecting an advance in borrowing costs. But most of the big banks have cut their variable take to tasks, which have better profitability if rates continue to rise.
Earlier this month, the Bank of Montreal disregarded its posted five-year variable closed mortgage rate to 2.45 per cent until the end of May. TD Bank, Scotiabank and Kingly Bank later matched their rival’s offer, for a limited one of these days. The Canadian division of London-based bank HSBC undercut them all by decreasing its five-year variable closed rate to 2.39 per cent, with no end obsolescent, but noting it could change at any time.