* Banks' EPS seen down 4-6 pct in first quarter
* Lower trading revenue, higher loan losses expected
* Retail, wealth management bright spots
By Andrea Hopkins
TORONTO, Feb 21 Having weathered the financial
crisis, Canada's big banks are expected to report unimpressive
profits in their financial first quarter, suffering from the
lagging effects of the recession and consequent loan losses.
While the economic slump may be over, the nation's top
lenders could report their biggest credit losses of the current
cycle when they post earnings beginning next week, taking a bit
of shine off their still-huge profits.
The bad loans, combined with a decline in trading revenues
after a record-high quarter a year earlier, will produce what
analysts expect to be an earnings trough for Canadian banks
before profit growth resumes this year and into 2011.
Analysts forecast a 4 to 6 percent decline in earnings per
share in the first quarter, ended Jan. 31, compared with the
year-before quarter as lower trading revenues and more credit
losses offset a pickup in banks' wealth management business and
growth in retail loans.
"In the first half of 2010, it's fair to say so far we're
in a holding pattern, and our holding pattern is pretty benign.
The banks are comfortably profitable and generating capital
every quarter in the form of retained earnings," said Moody's
analyst Peter Routledge.
"It's a transitional year going from recession to an
Canadian Imperial Bank of Commerce (CM.TO) and National
Bank of Canada (NA.TO) kick off the earnings season on
Thursday, while Bank of Montreal (BMO.TO), Royal Bank of Canada
(RY.TO) and Toronto-Dominion Bank (TD.TO) report in the March 1
week. Bank of Nova Scotia (BNS.TO) caps the earnings season
While profits remain solid, analysts are divided over
whether the banks are a good buy. The group's shares surged
early in 2009 but have since given average returns.
"Canadian banks have outperformed global banks
year-to-date, but are still underperforming U.S. regional
banks, despite lower regulatory risk, higher asset quality and
stronger capital," UBS analyst Peter Rozenberg said in a
"From here, we do not see any particularly compelling
catalysts in the immediate term, and we expect the group to
remain largely range bound," TD Newcrest analysts wrote.
CREDIT, CAPITAL QUESTIONS REMAIN
Provisions for credit losses, the amount of money banks set
aside to cover bad loans, plagued the banks through 2009 as
consumers and businesses struggled to pay back debts in the
recession. While the economy has improved, analysts say loan
losses lag a recovery and are just starting to peak.
Barclays Capital analyst John Aiken says businesses went
into the recession with such strong balance sheets that it is
taking longer for them to succumb to credit problems.
"Ultimately what that means is we don't think we've seen
the peak on business provisions, and we're forecasting that to
happen in the second half of 2010," Aiken said.
A decline in trading revenues will also take a bite out of
profits in the first quarter. While a stock market recovery
powered capital markets through 2009, trading flows are
returning to more normal levels and will look anemic compared
with both the year-before quarter and the fourth quarter.
"We do not believe the banks are set to report declines of
the magnitude reported in the United States last quarter,
although we have taken our estimates for this line down and are
now looking for an average 13 percent quarter-over-quarter
decline for the Big Six banks," National Bank analyst Robert
Sedran said in a research paper.
But there are bright spots for the banks as well.
Recent Bank of Canada data shows loan growth is still
improving, which bodes well for the domestic banking segments
that are a traditional stronghold for the Canadian banks.
Canada's housing market is surging, and mortgage lending is
a revenue staple for the banks. Consumer sentiment has also
rebounded more quickly in Canada than in the United States,
which should boost sales of wealth management products.
Capital levels at the banks, already at impressive levels
compared with global peers, are also expected to rise in the
quarter amid uncertainty about regulatory requirements.
While that puts Canadian banks in a strong position for
acquisitions, growth or dividend increases, no big
announcements are expected until later in the year, when new
global rules on capital become clearer.
"It's not that they can't do something -- they could do
whatever they want (with these capital levels). But both the
market and the regulator are implicitly telling banks more
capital is a better thing ... so we shouldn't expect anything
to happen right away," Aiken said.
(Reporting by Andrea Hopkins; editing by Peter Galloway)