Canada's largest lenders, whose shares soared to record highs last month, are banking on wealth management to help counter a capital markets slump and weaker consumer borrowing.
Wealth management will be a significant part of earnings growth for the country's banks in the fiscal fourth quarter, which kicks off tomorrow when Bank of Montreal reports results, said John Aiken, a Barclays Plc analyst in Toronto. The six largest lenders will average per-share profit growth of 11 percent after excluding some items for the period ended Oct. 31, Aiken estimates.
"Exposure to wealth management is probably going to be a key to outperformance this quarter," Aiken said in a Nov. 21 interview. "The improving global equity valuations as well as sentiment is likely going to see fairly significant growth in assets under management."
Banks stand to gain from improving global stock markets, which can increase revenues at their asset-management and brokerage businesses. The MSCI World Index was up 23 percent as of Oct. 31 from a year earlier and Canada's benchmark Standard & Poor's/TSX Composite Index climbed 7.6 percent.
Shares of Canada's major lenders also rose, with all but Canadian Imperial Bank of Commerce and Laurentian Bank of Canada reaching record highs in November. The eight-company S&P/TSX Canadian Banks Composite Index hit a record high on Nov. 25 and has advanced 16 percent this year, more than double the gain of Canada's benchmark index, while lagging the 33 percent increase of the KBW Bank Index of two-dozen U.S. lenders.
Royal Bank of Canada, Canadian Imperial and Bank of Nova Scotia are among lenders that collectively spent more than C$10 billion ($9.4 billion) buying private-wealth businesses, asset managers and other wealth assets in the past six years. Wealth management accounted for 10 percent to 20 percent of profit for the six lenders in the first nine months of the fiscal year, according to company financial statements.
"The banks have been wanting to get into this area for some time, and with the demographics it's an area they're putting more and more focus on," said John Kinsey, who helps manage about C$1 billion including bank shares at Caldwell Securities Ltd. in Toronto. "It's certainly a direction where they want to go."
Banks are attracted to an aging demographic of affluent people who are increasingly looking for financial advice and money management to help preserve their wealth as they approach retirement.
Banks around the world have focused on wealth management as low interest rates and new rules regarding capital levels cut profitability. Zurich-based UBS AG has shrunk its investment- banking business to concentrate on managing assets for wealthy clients. Morgan Stanley completed its purchase of a brokerage joint venture with Citigroup Inc. in June to more than double its wealth-management division, and is taking a stake in Mitsubishi UFJ Financial Group Inc.'s Japanese wealth-management business.
Canada's lenders, ranked the world's soundest for six straight years by the World Economic Forum, have been stepping up efforts to bolster business from areas outside domestic retail banking, where the pace of growth has slowed as over- indebted consumers rein in borrowing.
"We are a little bit concerned that the fourth quarter may actually be the last hurrah for Canadian retail banking," Barclays's Aiken said. "The expectations for growth in 2014 are not as strong as what they were in 2013."
Total household credit in October expanded by 3.7 percent from the same month in 2012, according to Bank of Canada data. That's almost a third of the growth from five years earlier, and the most sluggish pace in 30 years.
Canada also posted the lowest year-over-year increase in residential mortgage credit in 12 years in October, according to Bank of Canada data. Mortgage growth fell to 4.8 percent in the month from its 23-year high of 13 percent in May 2008, the data show.
"It's still their bread-and-butter, so as long as it chugs along the train moves forward," Caldwell's Kinsey said. "If our economy does start to slow, mortgage lending and personal loans could be a rough area for the banks."
Lenders may also see lower profit at their capital markets operations as a 27 percent drop in the value of mergers and acquisitions pare investment-banking fees. There were 400 takeovers valued at $27.5 billion involving a Canadian company completed in the quarter, down from 461 deals valued at $37.5 billion a year earlier, according to data compiled by Bloomberg.
The six big banks are expected to increase average per- share adjusted profit by 7 percent in the quarter from the year- earlier period, according to Peter Routledge, an analyst with National Bank Financial in Toronto. That's on par with the group's average profit growth in this fiscal year's prior quarters and below the 10 percent average quarterly growth last year and 16 percent improvement in 2011, he said.
"Bank investors will still be happy, but they won't be as delighted as they were pre-crisis," said Routledge, who estimates profit growth may slip to 6 percent by 2015. "The most important revenue driver for the banks -- household credit growth -- is half what it was in the mid-2000s, so investors will be happy with 7 percent earnings growth given that dynamic."
Bank of Montreal, Canada's fourth-largest lender by assets, may raise its dividend by two cents to 76 cents a share when the Toronto-based lender reports results, according to Bloomberg Dividend Projections. National Bank of Canada, the sixth-biggest bank, may raise its payout four cents to 91 cents a share when it reports on Dec. 4, the Bloomberg forecast shows.
Canadian Western Bank, an Edmonton, Alberta-based lender, may raise its dividend by a penny to 19 cents when it reports the same day, while Laurentian Bank, based in Montreal, may boost its payout by 2 cents to 52 cents when it reports on Dec. 11.
Bank of Montreal is expected to post profit of C$1.57 a share excluding some items, down 4.7 percent from a year ago, according to the average of 14 analysts surveyed by Bloomberg.
National Bank is estimated to post adjusted per-share profit of C$2.09, up 8.2 percent from a year ago, when the Montreal-based lender reports, according to analysts.
Royal Bank, the country's largest lender, along with No. 2 ranked Toronto-Dominion Bank and Canadian Imperial, the fifth- biggest lender, report on Dec. 5. Royal Bank is estimated to increase profit by 9.8 percent from a year earlier to C$1.39 a share, while Toronto-Dominion is predicted to lift profit by 8.6 percent to C$1.99 a share. Canadian Imperial is expected to increase per-share profit by 5.7 percent to C$2.16, according to analysts.
Scotiabank, the third-largest lender, is estimated to post adjusted per-share profit of C$1.31, up 8.2 percent from a year ago, when it reports on Dec. 6, according to analysts.