Outlook for interest rates, inflation are key trends as banks set to report earnings

Investors watching bank earnings that start this week will be keeping a keen eye on any hints at how the institutions expect to fare with the two big trends this year: rate hikes and inflation.

The central banks of Canada and the U.S. are expected to start raising rates in March, so analysts will be watching for any outlook changes from Canadian banks on how they expect the higher rates to play out, Scotiabank analyst Meny Grauman said in a note.

“The outlook for rates and the impact that this will have on earnings should remain investors’ key focus heading into Q1 reporting.”

Expenses will be another key trend to watch as wages and other costs rise in the competitive growth environment and as banks invest heavily in technology, Grauman said.

RBC analyst Darko Mihelic said in a note that bank CEOs have so far been saying inflation risk is manageable, but he’ll be looking for any change in tone given recent inflation data and the rising costs U.S. banks reported in January.

He forecasts that first quarter expenses will be up 1.1% from the previous quarter, and up 3.9% from a year earlier.

Mihelic said that for first quarter results, he expects core earnings per share to climb 3% quarter-over-quarter and 9% year-over-year.

For 2022 as a whole, he expects core earnings-per-share growth of 6%, driven by rising interest rates, improved loan growth and solid credit quality.

The earnings results for the quarter ended Jan. 31 come as the Canadian bank index has well outpaced the TSX and S&P 500 as investors have shifted from growth stocks such as technology to more value-oriented options like banks, which are now trading at the higher end of their historical trading range.

Grauman, however, said bank stocks still have room for growth amid rising interest rates, a strong Canadian mortgage market and a shift to value stocks.

“The key risks to our outlook include Covid, as well as the prospect that rate increases trigger a recession, but we view those risks as relatively modest and believe that the positives continue to outweigh the negatives at this stage in the cycle.”

Dividend increases were the big focus of the last quarterly results, but Grauman said he isn’t expecting further increases this quarter.

One of the other remaining unknowns is the potential special tax on banks that the federal government has said is coming, possibly to be announced in conjunction with the next budget.

But investors so far haven’t shown much concern, Barclays analyst John Aiken said in a note last month.

“The market has shrugged off the impact, likely because it can be recouped through fees.”

The coming higher rates should benefit banks globally, but especially in Canada, he said.

“For the Canadian contingent, which has been facing net interest margin compression, the relief will be palpable.”

Royal Bank kicks off earnings on Thursday, followed by CIBC and National Bank on Friday, BMO and Scotiabank on March 1, and TD Bank on March 3.