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PREVIEW-Canada banks to post muted 1st qtr; stress test change may lift mortgages

By Nichola Saminather
    TORONTO, Feb 20 (Reuters) - Canadian banks are set to post
muted quarterly profit growth, driven by higher credit
provisions, when they begin reporting earnings on Friday, but a
change to a mortgage stress test could brighten prospects for
the year, investors and analysts said. 
    Canada's biggest lender, Royal Bank of Canada  RY.TO , will
kick off banks' first-quarter earnings reports, following the
sector's worst year for growth since the financial crisis.*:nL4N28F2XU
    Analysts expect quarterly earnings per share to grow 4% to
6% from a year ago, similar to the forecast pace for fiscal
2020, and an increase in loan-loss provisions of between 9% and
    "Until this trend is broken, we believe investors will
remain cautious on the sector due to uncertain earnings
expectations," said National Bank Financial analyst Gabriel
    Canadian bank stocks  .GSPTXBA  have risen 1.9% over the
past year, underperforming the Toronto stock benchmark's
 .GSPTSE  11.8% gain.
    Rising bad-loan provisions due to economic uncertainties,
oil price declines and rising consumer insolvencies are expected
to continue to weigh on banks during the quarter. While some
headwinds, such as the U.S.-China trade war, have eased, they
have been replaced by other concerns.  
    The coronavirus outbreak was mentioned by 75% of U.S. 
companies on the S&P 500 index  .SPX  reporting earnings, said
Diana Avigdor, head of trading at Barometer Capital, who is
positive on banks.
    "So there might be some possibility that (Canadian banks)
will prepare something for this," she said.
    But a change to a government-mandated mortgage stress test
that would lower the qualifying rate for borrowers, set to take
effect on April 6, could boost home loans this year.*:nL1N2AI0XH
    "We welcome the change ... because it should, at the margin,
improve mortgage loan demand," said Brian Madden, portfolio
manager at Goodreid Investment Counsel, who holds bank shares. 
    "A lot of market share was slipping away from the banks to
the shadow banking sector," he added. "This should hopefully
stem that."
    With mortgage pricing expected to remain competitive, the
"slightly better incremental mortgage growth" could be offset by
lower margins, said Canaccord Genuity analyst Scott Chan. 
    For every 1% divergence in the growth rate between
residential mortgages and other loans, earnings would be
adversely affected by 0.5% on average, Credit Suisse analysts
wrote in a note last month.
    "Banks are starving for growth," said Greg Taylor, chief
investment officer at Purpose Investments. "But they are going
to have to look at their internal risk controls to see if they
want to be extending more mortgages in an already inflated

 (Reporting By Nichola Saminather; Editing by Richard Chang)
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