* Stronger year-over-year markets revenue to drive growth
* RBC, BMO, National Bank seen with strongest quarters
* Housing data shows slowing activity
* National Bank only top 6 bank seen raising dividend
* RBC kicks off reporting on Thursday
By Cameron French
TORONTO, Nov 25 (Reuters) - Slowing housing activity and uncertain financial markets will not stop Canada's banks from reporting solid increases in quarterly profit starting this week, although recent gains in their shares mean it might take blockbuster results to push the stocks much higher.
Blockbuster earnings are plausible, given that Canada's big banks all topped estimates in the previous August reporting period. But few see that happening again in the banks' fiscal fourth quarter, due to an expected decline in trading revenue and higher expenses.
"They won't' be as good as the third quarter," said John Kinsey, a portfolio manager at Caldwell Securities in Toronto.
Royal Bank of Canada, the country's largest bank, will kick off the two-week reporting period on Thursday, with an expected core profit of C$1.26 a share, up from a year-before profit of C$1.09 per share.
Considered the world's soundest banks, Canada's big lenders have been bracing for a likely slowdown in consumer lending as tighter government mortgage rules cool the hot housing sector.
But analysts say it will be the banks sizeable brokerage businesses that will have the most sway on earnings growth this quarter as recently strong equity markets drive up advisory and trading revenues, providing a stark contrast to weakness in those revenues in the fourth quarter of 2011.
"Capital markets should actually be fairly good, mimicking what we saw with the U.S. and European banks," said John Aiken, an analyst at Barclays Capital.
The fiscal year for Canadian banks runs from November to October, meaning the fourth quarter of August-October overlaps with the third quarter of U.S. and European banks.
RBC, with the largest capital markets business of the Canadian banks, should benefit the most. Bank of Montreal and National Bank Financial, the No. 4 and No. 6 banks, also have relatively high capital markets exposure.
Those three banks are expected to show the strongest year-over-year core profit gains of Canada's top six banks.
Despite the expectations of solid profits, analysts say bank shares may struggle to rise much from current levels, even if the earnings top estimates.
Bank stocks have already outperformed the broader Canadian stock market this year, in spite of worries of a housing slowdown. The bank-heavy S&P/TSX financials index is up 8 percent year-to-date, versus a 2 percent rise for the S&P/TSX composite index.
Surprisingly strong profits and relatively rich dividends - the banks yield between 3.8 and 4.9 percent - have been behind the outperformance. With bond yields near historic lows, the bank dividends appeal to yield seekers.
"If you want to park your money while you're waiting for things to pick up, they're a good place to be because interest rates are still very low and it looks like (U.S. Federal Reserve Chairman Ben) Bernanke won't raise rates," Kinsey said.
Although analysts say the banks' current valuations are appropriate, they suggest caution in the new year, given the housing market uncertainty.
Also, concerns about volatile capital markets and high consumer debt levels prompted Moody's Investors Service to warn in October it could cut its ratings on five of Canada's top six banks. RBC received a similar warning in June.
And on the dividend front, the top five banks raised dividends in August, leaving National the only large lender expected to do so in the current quarter.
While markets-related revenue may be the driver of profits this quarter, it is consumer lending and mortgages that are the banks' core businesses, and the chief source of worry for investors, analysts say.
Canadian home prices slipped by 0.2 percent in October from September and year-over-year price gains slowed for the 11th straight month, according to the Teranet-National Bank Composite Price Index.
That has slowed mortgage and consumer loan growth to some extent: RBC Capital Markets sees year-over-year retail loan growth of 5.8 percent for the group, compared with 6.6 percent in the third quarter. But it has not shrunk as much as some had feared, prompting analysts to push back their expectations for when slowing loans will take a meaningful bite out of earnings in the sector.
"I think it's going to be more of a 2013 event. Looking at (regulatory) data, it looks like lending is going to be a bit better than my expectations (in the fourth quarter)," said Tom Lewandowski, a St. Louis-based analyst at Edward Jones.
However, profits from the loans will be pared by narrower interest rate spreads as consumers have renewed previous higher-rate loans at lower current rates.
"The banks have been able to manage to buck the expectation of slowing loan growth if only just to the face the market saying 'yeah, but next quarter it will happen'," Aiken said.