The Canadian banks are expected to benefit from rising U.S. interest rates and fewer bad loans in the oilpatch as they start reporting their latest quarterly results this week, but analysts say worries about the housing market and consumer debt remain key concerns.
"The reality is that given all of the fears about the Canadian mortgage market, I think that even if the results are good, people will dismiss them as being backward-looking," said analyst Meny Grauman of Cormark Securities.
The Bank of Montreal will kick off the earnings parade on Wednesday, followed by Royal Bank, TD Bank and CIBC on Thursday. Scotiabank will report May 30.
Edward Jones analyst Jim Shanahan said fee income from trading activities and other types of charges was a key driver of earnings growth last quarter.
That likely moderated during the second quarter, but a strengthening in net-interest margins — stemming from U.S. interest rate hikes in December and March — will likely pick up some of the slack, he said.
BMO and TD are most likely to benefit from the rate increases, Shanahan said.
The banks could also see some improvement in their loan loss provisions as stability has returned to the oilpatch.
"From a credit perspective we should see some continued improvement within the oil and gas portfolios," Shanahan said.
However, analysts said concerns about high home prices, debt-laden consumers and a liquidity crisis at mortgage lender Home Capital Group could all weigh on the bank stocks.
Ratings agency Moody's downgraded the credit ratings for Canada's big banks earlier this month, citing concerns that over-stretched borrowers and high house prices have left lenders vulnerable to potential losses.
Some observers have also fretted about the situation at Home Capital and what it could mean for the broader banking sector. The alternative lender had to secure an emergency $2-billion line of credit after savers started pulling out their deposits, which the company uses to fund its lending, en masse in recent weeks.
But CIBC analyst Robert Sedran says concerns that Home Capital is the so-called canary-in-the-coal-mine are overblown.
"There may be a test for the housing market coming when the economy next enters recession, but the troubles faced by Home Capital Group are about Home Capital, not the housing market," Sedran said in a note to clients.
The banks are also likely to be peppered with questions about their sales practices, Shanahan said.
The issue has drawn scrutiny since media reports in March alleging that some bank employees broke the law in order to meet aggressive sales targets and keep their jobs.
The Financial Consumer Agency of Canada launched its own review of business practices in the financial sector after the accusations surfaced.
The banks could see slightly elevated expenses stemming from the allegations. TD Bank has said it is enlisting the help of an outside firm to review its business practices.
However, these costs are unlikely to be large enough to have a significant impact on the bank's earnings, Shanahan said.