By: Colin Cieszynski, CFA, CMT, Chief Market Strategist, CMC Markets Canadian banks are reporting results for their fiscal first quarters which ended January 31st. November to January was an active time for stocks, commodities, and currencies around the world and Canadian markets were no exception seeing the price of oil crash, the loonie sell off and the Bank of Canada deliver a surprise interest rate cut. Major events throughout the quarter suggest we could be in for more surprises than usual out of the banks although falling share prices in recent months also suggest lower expectations may have already been factored in. Higher volatility in world markets over the last few months raises the risk of surprise trading losses that could impact results, but also brings the prospect of trading gains as well depending on which side the banks took. The decline in CAD relative to USD and the stronger US economy relative to Canada in the quarter suggests that banks with a higher exposure to the US market could outperform on results. Not only may US operations generate higher profits, but those profits could then be translated back into more Canadian dollars than a quarter ago. In addition to the falling dollar, the oil price crash may have a big impact on bank results. In particular, the street may focus on what impact a slowing oil and gas sector could have on loan loss provisions. In addition to direct lending to oil and gas companies, the banks’ exposure to the Alberta real estate market which appears highly vulnerable to a crunch here may also attract scrutiny. Even though last quarter was their fiscal year-end, only two of the six main Canadian banks (Scotia and RBC) raised dividends last quarter. With the Canadian economy having slowed in recent months and with the full impact of the oil crash yet to be fully felt, banks may remain stingy on increases although its unlikely any will cut dividends this quarter either. Earnings Expectations This quarter, the street is expecting the Big Five Canadian banks to deliver pretty much the same results as last quarter, while price/earnings ratios run in the 10-12x range. This suggests that the street is looking at a steady as she goes quarter. While expectations do not appear to be overly aggressive, aggregate analyst forecasts appear to be showing some complacency about the risk of disappointment on earnings or the potential for warning signs about future results, particularly related to loan loss provisions. Last quarter, Canadian bank results were in-line to slightly below expectations, with TD and BMO missing the most. This time around, we could see more of a variation from expectations depending on how the big changes in the price of oil and the value of CAD play out against each other. Adjusted Report Earnings Bank Date P/E Estimate Last quarter result Bank of Montreal Feb 24 11.2x $1.63 $1.63 below street $1.67 Bank of Nova Scotia Mar 3 11.4x $1.38 $1.39 below street $1.40 CIBC Feb 26 9.9x $2.26 $2.24 below street $2.25 Royal Bank of Canada Feb 25 11.5x $1.58 $1.59 as expected TD Bank Feb 26 11.8x $1.12 $0.98 below street $1.05 Source: Bloomberg L.P. Recent Share Performance Canadian banks comprise 27.3% of the S&P/TSX60 index, even more than the Large Cap index’s 21.4% weighting in the energy sector. Canadian banks sold off in early December following the last round of earnings reports, reflecting disappointment among traders with the results. Since the beginning of 2015, the banks have underperformed the index, likely meaning that they did not take part in the oil sector rebound as crude staged a relief rally. Among the banks, Royal and TD have been the relatively stronger performers, while CIBC has significantly underperformed its peers. Source: CMC Markets