Canada's biggest banks are likely headed into a challenging year as consumer lending growth slows alongside persistent economic weakness, analysts suggest.
The combination could provide a dark lining to what are expected to be good earnings results for the first quarter when most banks report starting this week. But it will also set the stage for a cautious remainder of the year.
Analysts expect most of the big banks will increase their dividends in the period.
Much of the concern lies in the domestic retail banking operations, the side of the business dedicated to consumers, which has fared well in recent years. The division could weigh heavy on the banks' overall growth, as Canadians face record-high debt levels and the housing market comes off its highs.
"It's just a matter of the magnitude of (the consumer lending) decline and what it means for the underlying financials," said Tom Lewandowski, financial services analyst with Edward Jones in St. Louis.
He said the focus will be on whether the banks are able to offset the decline through other lending venues to businesses.
Last month, Royal Bank chief executive Gord Nixon said the bank was experiencing a weakness in mortgage lending due to the slowdown in the real estate market. He said that while he expects the country's housing market to remain solid, lending would likely slow to mid single digits.
Bank of Montreal will be the first to report its first-quarter earnings on Tuesday. Consensus expectations are for earnings per share of $1.47 and $3.88 billion in revenue, according to a survey by Thomson Reuters.
On Thursday, Royal Bank is expected to post earnings per share of $1.32 with revenues of $7.6 billion. TD Bank expectations are for $1.93 earnings per share and revenue of $6 billion.
Both CIBC and National Bank will be closely watched because they rely most on their domestic banking operations which could make them especially vulnerable to the slowdown.
Barclays analyst John Aiken downgraded both of those banks, with National falling from overweight to equal weight, while CIBC has been dropped to underweight from equal weight with a stock price target of $81.
CIBC, which also reports Thursday, has expectations for earnings of $2.08 per share and $3.22 billion in revenue by analysts.
And National Bank is expected to have $2.01 per share of earnings and $1.28 billion in revenue.
Real estate slowdown
"We favour the banks that have smaller contributions from domestic retail net interest income and have greater exposure to capital markets," Aiken wrote in a note.
If domestic retail banking slows, Scotiabank, BMO, and Royal Bank are the least sensitive, Aiken said.
The last to report is Scotiabank, on March 5, which is expected to earn $1.26 per share and $5.04 billion revenue.
All of the major banks are expected to increase their dividends, with the exception of National Bank and BMO.
Bank earnings are closely watched during the first quarter because executives tend to offer a firm outlook for the coming year, which can help analysts determine if more trouble is afoot.
"Maintaining the trajectory of growth momentum is going to get more and more challenging, it's as simple as that," said Brad Smith, senior financial services analyst at Stonecap Securities.
He also suggested that a slowdown in domestic operations could play out over a longer period of time.
"I think people will come out of the quarter going 'It really hasn't slowed as much as I thought it was going to slow,"' he said.
"We always imagine things will happen more quickly than they do."