A number of analysts are lowering their profit estimates and cutting their 12-month price targets on Canada’s Big Six banks ahead of earnings season that gets underway next week.

In a note to clients on Wednesday, Canaccord analyst Scott Chan said he revised his adjusted earnings-per-share estimates for the banks down by an average of five per cent as they face a number of macroeconomic headwinds including high inflation, a housing slowdown and recession fears.

Despite the downward revision, he’s still expecting average earnings growth of one per cent year-over-year.

“Credit trends likely will be topical due to the uncertain market environment as we see a normalizing of credit conditions,” Chan said.

He said he expects the banks to be more conservative with their provisions for credit losses in the third quarter and that there will be weakness in the lenders’ investment banking divisions. 

“As a result, we are lowering our target prices on average ~4 per cent with an expected total return of ~13 per cent for the group,” he said.

Canaccord maintained its buy recommendations on Bank of Montreal, Bank of Nova Scotia and Canadian Imperial Bank of Commerce and hold ratings on National Bank, Royal Bank of Canada and Toronto-Dominion Bank.

Chan said he favours BMO, Scotia, CIBC and TD heading into the third-quarter reporting season because of their larger exposure to personal and commercial banking, while he’s “generally less constructive” on National and RBC because of their large investment banking units.

He also pointed out valuations of National and RBC are trading at a more modest discount than their banking peers compared to their historical averages.

CREDIT IN FOCUS

As borrowing rates rise and the economy remains on uncertain footing, some analysts said they’re narrowing in on credit trends this upcoming reporting season.

“Deterioration in the economic outlook and factors such as inflation and the impact of higher interest rates on debt service ratios necessitate greater conservatism in provision accounting,” Gabriel Dechaine, an analyst at National Bank of Canada Financial Markets, said in a client note on Monday.

He lowered his earnings-per-share estimates for the big banks by an average of one per cent and very modestly cut his price targets on BMO, Scotia, CIBC and RBC.

Dechaine said the big banks still have relatively elevated cash reserves left over from the pandemic for loans that could potentially go bad, but that he expects all the big banks to add to those cash piles considering the concerns over a looming recession.

In prior recent quarters, the big banks had begun releasing some of their provisions for credit losses as the economy boomed after pandemic-related restrictions were lifted.

Meanwhile, CIBC analyst Paul Holden said in a note on Monday that credit trends will not be a tailwind nor a headwind for the big banks, and agreed with Dechaine’s call for the banks to add to their provision reserves.

'TOUGH SLOG' FOR CAPITAL MARKETS

Many of the analysts see much of the weakness in the banks’ upcoming financial results to stem from capital markets, however, trading revenues could surprise to the upside.

The capital markets business is “in for a tough slog” as investment banking activities have “ground to a halt,” Dechaine said.

“However, as U.S. bank results showed us, we could still see strong trading revenue growth. This divergence is important when evaluating prospects of the more capital markets-focused banks,” he said.

CIBC’s Holden also pegged capital markets as likely being soft and is forecasting an 11 per cent fall in capital markets revenue for the banks compared with the prior quarter.