* 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 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.
SHARES GAINS BAKED IN
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.
CONSUMER LENDING GROWTH SLOWING
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
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.