As Canadian banks get set to report quarterly results next week, analysts at RBC Capital Markets are predicting a challenging quarter for many of the nation’s major lenders, saying the “macroeconomic outlook has become more uncertain.”

In a report released Wednesday, analysts at RBC Capital Markets lowered core earnings per share estimates on five major banks by an average of around three per cent. The group of lenders will begin reporting second-quarter results on May 24 with Bank of Montreal and Bank of Nova Scotia .

The analysts lowered second-quarter core earnings per share estimates for BMO by 5.8 per cent, Bank of Nova Scotia by four per cent, Canadian Imperial Bank of Commerce by 1.1 per cent and Toronto-Dominion Bank by 2.8 per cent. For National Bank, second-quarter core earnings per share estimates were flat.

“Our reduced expectations mostly reflect higher stage two PCLs [provision for credit losses] than we previously assumed, as the macroeconomic outlook has become more uncertain. We also lower our expectations for capital markets,” the report said. 

However, the report said the reduced outlook for Canada’s major banks appears to be more of a short-term issue. 

Over the longer term, the analysts said that unless a more severe economic downturn occurs, they predict revenue improvement to be “partly offset by normalizing PCLs [provision for credit losses],” which they said would create an approximate five-per-cent growth to core earnings per share on average in 2024. 

Expectations surrounding the performance of capital markets were also lowered.

Equity markets for large Canadian banks “remained pressured in the quarter,” the analysts wrote. Revenue during the second quarter is anticipated to decrease by around two per cent compared to the previous quarter and earnings to drop by around 11 per cent during that same time. 

BANK OF MONTREAL

The acquisition of the Bank of the West by BMO in February could weigh on the Montreal-based lender, the report found.

“BMO will record integration charges, a credit mark, a fair value mark, close out its ‘hedge’ for the fair value mark, and likely engage in some RWA [risk-weighted assets] management, all during a volatile quarter in the U.S.” 

As a result, the analysts said they expect weaker quarterly results from BMO, as it likely had to manage “conservatively” during the quarter. 

TD BANK

TD Bank’s cancelled deal with First Horizon Corp. will result in the Canadian bank incurring a US$225 million fee, which will impact the bank’s bottom line.

“TD had invested US$494 million in FHN’s [First Horizon] preferred shares as part of the deal,” the analysts said.

“The merger agreement stated that if the merger was terminated due to failure to receive regulatory approvals, these preferred shares will be converted to FHN [First Horizon] common shares.”

The analysts stated in the report that TD Bank could record a $199 million loss due to the conversion of those shares, but that it could show up as an unrealized loss. 

U.S. BANKING 

Recent turmoil stemming from bank collapses in the U.S. are likely to influence the narrative during earnings season, according to a recent report from CIBC Capital Markets. 

“With the recent bank failures in the U.S., a main focus this quarter will be on funding and liquidity risks and the overall impact to (net interest margins) going forward,” CIBC analysts said in the report.

The analysts highlighted that banks with exposure to the U.S. could feel increased cost pressures. Additionally, given the banking situation in the U.S., Canadian lenders are likely to be more cautious regarding loans in the near future.

Meanwhile, in a note to investors Friday, Ebrahim Poonawala, an analyst at BofA Securities, said that BMO and CIBC could benefit from volatility in the U.S. banking sector.

“While not an immediate catalyst, a higher regulatory bar for U.S. regional banks could potentially allow BMO/CIBC to emerge as market share gainers,” he said.

BMO could see improvements in net interest margin following the integration of Bank of the West, Poonawala said in the report. This is due to the fact that as momentum gains for deposit repricing, perceived credit risks could incentives investors to remain cautious, he said.

Net interest margins might expand for CIBC as its “flat-lining expenses” in the second half of the year could spur positive sentiment, according to Poonawala.