With HSBC Canada’s fourth quarter results coming a few weeks ahead of earnings from the Big Six, analysts are again trying to gauge what it might mean for Canadian banks. They’ve had mixed responses.
It is important to note that HSBC’s quarter ended on Dec. 31, 2009, while the first quarter for the Canadian banks ends January 31, 2010. As a result, there are only two months of overlap so comparisons cannot be direct. The Big Six start reporting in a few weeks.
CI Capital Markets analyst Brad Smith thinks HSBC Canada’s margins bode well for the Bix Six (TD, Scotia, Royal, CIBC, BMO and National).
Overall, HSBC reported a 16 basis point (bps) net interest margin expansion, compared to a 3 bps increase during the previous quarter. A similar expansion for the Big Six in Q1 would equate to roughly $600-million in incremental quarterly earnings, Mr. Smith noted.
Over at Barclays Capital, John Aiken focused on trading revenues. He pointed out that while trading revenues were up on a sequential basis at HSBC, this was the result of write-downs in the third quarter related to its ABCP exposures. Normalizing for this, the analyst said trading revenues would have been down over 20% sequentially and were down 80% from a year ago.
“Weaker trading revenues are a material risk for the Canadian banks, which we do not believe is adequately reflected in current consensus estimates or valuations,” Mr. Aiken told clients. “That said, contributions from other sources of capital markets revenues were strong, consistent with our outlook.”
He admitted that with HSBC’s 16 bps margin gain, his forecasts for only modest margin expansion by the Canadian banks could prove to be conservative.
However, Mr. Aiken said the growth in provisions for credit losses HSBC experienced is a negative. The analyst believes that the market is anticipating lower provisions for the Canadian banks, but if HSBC’s experience is shared by the Big Six, this could generate material surprises to the downside.