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PREVIEW-Canadian bank earnings set to beat rising estimates on deal fees, reserve releases

TORONTO, May 21 (Reuters) - Canadian banks are expected to beat analysts’ estimates for quarterly earnings as strength in capital markets and wealth management overrides sluggish non-mortgage loan growth, and as they release some reserves on relatively few loan losses, investors said.

Many analysts have already been revising estimates higher for second-quarter profits at Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada, driven by improved credit conditions.

Analysts expect average core earnings per share for the top six lenders in the three months through April to more than double from a year ago, when they set aside nearly C$11 billion ($9.1 billion) to cover potential bad loans. That would be 9.5% lower from the previous quarter, largely due to fewer days in the period.

BMO kicks off earnings reporting on Wednesday.

Steve Belisle, a portfolio manager at Manulife Investment Management, expects the banks to claw back some of the bad-loan reserves, although the amount of this remains uncertain.

Analyst estimates “don’t usually expect credit recoveries,” Belisle said.

Capital markets businesses could post positive surprises, driven by fees on strong deal-making and issuances even though a surge in trading revenues lifted earnings a year ago, Belisle said.

Given the upward revisions to earnings estimates, many analysts have raised their share price targets, even though the Canadian banks index has already climbed nearly 60% over the past year, nearly double the gains seen in the Toronto stock benchmark.

Optimism around earnings have contributed to the gains, and that could reverse somewhat if they disappoint, said Bryden Teich, portfolio manager at Avenue Investment Management.

The six lenders are trading at 11.5 times forward earnings versus about 12.65 for their U.S. peers.

“The feeling is that valuations on 2022 aren’t demanding, and they don’t price in what’s going to happen with excess capital,” said Barry Schwartz, chief investment officer at Baskin Wealth Management.

Which banks release more reserves could provide insight into the quality of their loan books, Teich said.

“The banks really should be releasing reserves now... because a lot of loans that have been in delinquency, they’re going to write them off or the credit quality has gotten better,” he said. “The banks that release a lot of provisions tell you their lending practices have been much better.”

But Belisle warned that as government support fades and insolvencies “normalize,” the loan impairments that have so far been held at bay are likely to rise, although these would likely be covered by existing reserves.

“The second half is when a lot of things will happen, when we will start seeing impaired loans spiking,” he said.

But this could be offset by improved loan growth as pandemic-driven lockdowns end, and margins recover, he added. ($1 = 1.2059 Canadian dollars) (Reporting By Nichola Saminather Editing by Chizu Nomiyama)

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