The banking sector has been tough to invest in during 2016. The theme of investing in banks in Canada has also been difficult. A report from analyst K. R. Choquette of Credit Suisse noted on Wednesday that the Canadian banks managed to show a slight earnings beat in the first quarter. They also managed to turn in dividend hikes.

Credit Suisse maintains that Canadian banks managed to grind out another solid quarter with earnings growth of 6%. This was led by FX-assisted international operations. Their wholesale and capital markets were viewed as relatively strong, particularly in trading.

Choquette pointed out that the oil and gas segment’s provision for credit losses acted as a drag. Wealth management had one of its toughest quarters and insurance was very weak.

International earnings growth was 21% in Canadian dollars but was up just 6% in constant currency. The firm believes that a foreign exchange tailwind should last for another two quarters, and then there will be tougher comparable points by the fourth quarter of 2016.

Foreign exchange contribution to first-quarter earnings was meaningful, as shown below on each of the major Canadian Banks:

• Bank of Montreal (NYSE: BMO) saw a 3.4% benefit.
• Bank of Nova Scotia (NYSE: BNS) saw a 4.9% benefit.
• Canadian Imperial Bank of Commerce (NYSE: CM) saw a 3.6% benefit.
• Royal Bank of Canada (NYSE: RY) saw a 2.4% benefit.
• The Toronto-Dominion Bank (NYSE: TD) saw a 5.1% benefit.

Credit Suisse’s take was that Canadian retail earnings were solid at 6% in a challenging environment. Their provisions for credit losses were up 12% from the prior year and net interest margin was mixed among banks.

So far, the provisions for credit losses in the oil and gas segment have been very manageable at $259 million, with annualized ratio of 2.05%. Royal Bank of Canada led that level at 5.06%, while Toronto-Dominion Bank was the lowest at 0.72%. The overall earnings impact was 2.2% in the quarter.

Another boost was that the dividend increases continued this quarter as expected. Bank of Nova Scotia, Canadian Imperial Bank of Commerce and Royal Bank of Canada were in the 2% to 3% range. Even greater was Toronto-Dominion Bank with an 8% hike, but it has a once-a-year increase.

Choquette’s report said:

We remain very constructive on the group with banks adjusting to the challenging environment continuing to build capital and grind out earnings growth. We believe bank valuations are extremely compelling, trading near Financial Crisis levels despite the significant reduction in systemic risk. The enfolding “Mini Credit Cycle” is very heavily discounted in our view.

All in all, there is a very mixed bag of ratings here. Royal Bank of Canada remains Credit Suisse’s top pick with an Outperform rating. Credit Suisse still has Neutral ratings on Toronto-Dominion Bank, Bank of Nova Scotia and Bank of Montreal. The Firm rates Canadian Imperial Bank of Commerce as Underperform.

As a reminder, Credit Suisse’s Outperform and Neutral ratings are on a relative basis against peers rather than versus the broader market.

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