(Repeats Nov. 22 column)
* Trading revenues to offset loan losses again
* Profit expected, but barely above year-ago levels
* Core earnings likely obscured by clean-up accounting
By Andrea Hopkins
TORONTO, Nov 23 It was supposed to be a year of
blood-letting, but Canada's big banks are poised to close 2009
with another decent quarter as strong trading revenues again
offset big loan losses.
After stronger-than-expected performances through the worst
of the financial crisis, Canadian lenders should report a
profitable final quarter of their fiscal 2009, which ended in
October. But it may not be pretty.
"I usually refer to it as a kitchen-sink quarter," said
Barclays Capital analyst John Aiken, warning of the habit banks
have of throwing one-time charges into the final quarter to
tidy up the books for the new year.
The quarter will likely include smallish writedowns or
restructuring charges, but analysts predict the lenders will
chalk up enough revenue from capital markets and interest
margins to offset money they put aside for bad loans.
It is less clear if the overall profit will outshine that
of the fourth quarter of 2008. Some say earnings will be a bit
better than a year ago; others think they may be a bit worse.
"Regardless of what happens in the fourth quarter, we have
arrived at the end of a year that must be labeled 'better than
expected'," National Bank analyst Rob Sedran said in a research
note, predicting core cash earnings per share to be flat from a
year ago and down about 6 percent from the third quarter.
Canada's six biggest banks -- Royal Bank of Canada (RY.TO),
Toronto-Dominion Bank (TD.TO), Bank of Nova Scotia (BNS.TO),
Bank of Montreal (BMO.TO), Canadian Imperial Bank of Commerce
(CM.TO) and National Bank of Canada (NA.TO) -- report
fourth-quarter results between Nov. 24 and Dec. 8.
END IN SIGHT FOR BAD CREDIT?
As in previous quarters, the banks will grapple with big
provisions for credit losses. Unemployment means consumers
can't repay their loans and credit cards, and businesses are
expected to increase defaults in the quarters ahead.
And the worst of the credit woes may be ahead. While the
fourth quarter is expected to show another uptick in provisions
for losses -- in the area of C$2.3 billion ($2.1 billion),
according to CIBC analysts -- several experts forecast a peak
in credit losses in the first or second quarter of 2010.
That sets the stage for a recovery in core earnings
beginning the following year, making 2011 the year to judge
each bank's underlying earnings power.
"While we expect aggregate loan losses to continue trending
upward in the fourth quarter, along with unemployment rates, we
believe that the Canadian banks are close to seeing loan losses
peak," CIBC analyst Darko Mihelic said.
Credit woes are standard in economic downturns, but the
banks surprised many this year with their ability to churn out
healthy revenues from capital-markets related business such as
trading. Volatile markets meant more trades and more fees,
BRIDGE TO BETTER DAYS
Analysts generally view trading revenues as less valuable
than loan growth or plain-vanilla banking gains because they
are so unreliable. But National Bank's Sedran said profits from
trading were an acceptable way to cope with tough times.
"Fussing over earnings quality is a bull market luxury.
More important to us is the existence of those earnings that
act as a bridge to better days," Sedran wrote.
Trading revenues will be lower than the record-setting
third quarter, but are expected to be nearly double the fourth
quarter of 2008, when the banks suffered severe trading losses.
CIBC's Mihelic estimated C$2.2 billion in trading revenues --
nearly offsetting the C$2.3 billion in loan losses.
Next year will also be tougher as global rivals recover
from the crisis and compete more fiercely for business.
Still, Canadian banks are outshining competitors on the
capital front, boasting ratios well above both regulatory
minimums and internal targets.
The big Canadian banks raised equity early in the year to
bolster balance sheets, driving the average Tier 1 capital
ratio to 11.6 percent by the end of the third quarter,
according to UBS equity research.
No one expects those heady capital levels to be brought
down yet through dividend increases or share buybacks.
But the guessing game of which bank will raise its dividend
first has already begun. Macquarie analyst Sumit Malhotra
believes National Bank and Royal Bank may be the first -- just
not in time for the fourth-quarter reporting season.
(Editing by Janet Guttsman)
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