Last week saw CIBC and National Bank of Canada report positive first quarter surprises. As a reward, shares in both banks rose more than 4%.
With the country's remaining four big banks due up this week, Michael Goldberg, Desjardins Securities analyst, said investors might want to brace for more bad than good news.
"The positive market reaction to lower-than-expected loan losses at CIBC and National Bank en route to higher-than expected earnings demonstrates the advantage of maintaining a surplus allowance," said Mr. Goldberg in a note to clients.
"For the banks still to report, that advantage goes to TD, with BMO, Bank of Nova Scotia and Royal Bank less likely to report positive surprises."
One of the pre-conditions for reporting lower-than-expected loan losses is solid credit quality, Mr. Goldberg explained. While all Canadian banks have managed their credit quality well, not all are equal when it comes to moderating loan losses as new loans become impaired.
The key, he said, is each bank's surplus allowances. In the case of CIBC and National Bank, they entered the first quarter of fiscal 2010 with surpluses of $132-million and $233-million, respectively.
TD Bank is the only other bank with surplus allowances at $57-million. Royal Bank has gross NPLs in excess of allowances for losses of $1.4-billion. Bank of Nova Scotia is saddled with net NPLS of $1.1-billion and Bank of Montreal has net NPLs of $2.3-billion.
"Consequently, it has been our view that these banks, particularly Royal Bank, have less capacity to report provisions below their NPL formations as the credit cycle continues without increasing their net NPLs further, thereby increasing their potential for higher loan losses in the future," he said.