The Canadian stock market is on a roll…
The local equity market started the year on a positive note after a lagging performance during 2013. So far this year the Toronto Stock Exchange has gained 4.3%, in local currency terms, which makes it one of the better performing markets globally. The best performing sectors were the materials and healthcare sectors followed by the information technology sector, all returning 10% or more so far this year. The charge by the gold stocks was particularly noticeable, with super performances almost across the board.
The laggards were all to be found among the more defensive sectors, namely the financial, telecommunications and consumer discretionary sectors, all with slightly negative returns. Individual stock performances among the index constituents in these sectors varied considerably. In the telecommunications sector, for example, the best performing stock was Telus (TSX:T)(NYSE:TU) with a 6% increase compared to Rogers Communications (TSX:RCI.B)(NYSE:RCI) which declined by 11% so far this year.
The earnings season is progressing with some interesting trends emerging. One such trend became clear again last week when two of our highlighted stocks, Agrium Inc. (TSX:AGU)(NYSE:AGU) and Loblaw Companies Ltd (TSX:L), had poor or moderate results (relative to expectations) accompanied by a more positive 2014 outlook statement from management. Both stocks increased in price during the week again demonstrating the forward-looking nature of financial markets.
Watch the performance of the big banks this week
The major Canadian banks are expected to report quarterly results during the week. Given the high debt levels of Canadian consumers, the retail lending and deposit taking activity will be scrutinised for signs of slowing growth and provisions for bad debt. Net interest margins have been under pressure in the low interest rate environment and the focus will be on any possible improvement with the upward movement in longer term interest rates. We highlight three expected results below.
BMO (TSX:BMO)(NYSE:BMO) is expected to report on Tuesday, with earnings per share of $1.54 for the quarter versus $1.52 a year ago. The bank has managed solid lending growth over the past few years spurred a 26% expansion of the residential lending book since 2011. It will be interesting to see whether the bank can continue this growth in the higher mortgage rate environment. Trading revenues, which are not a major portion of the bank’s revenue but certainly a swing factor, could recover from the sharp previous quarter drop to more normal levels. Finally, we should see a further update on the proposed U.S. $1.3 billion acquisition of the asset management firm F&C Asset Management.
Royal Bank of Canada (TSX: RY)(NYSE:RY) will report on Wednesday with expected earnings per share of $1.43 compared to $1.38 a year ago. The bank derives most of its income from the Canadian banking and capital markets operations. Growth in the Canadian banking operation is constrained by the debt laden consumer but the capital market operations should be able to continue its strong performance of 2013 supported by the ongoing recovery in financial markets.
Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is expected to report on Thursday with earnings per share of $1.04 compared to $1.00 a year ago. I would be watching carefully for a repeat of further abnormally high weather related insurance claims and the provision for credit losses. Provisions have reached a multi period low in the last quarter of the 2013 financial year while the impaired loan experience remained unchanged.
Foolish bottom line
On the positive side, one could expect a further improvement in the USD based banking operations, which now contributes about 23% of the total Bank income. Return on equity for these operations are still only 9% as compared to the 48% of the Canadian retail operations, leaving ample room for improvement.