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PREVIEW-Canadian bank profits to rebound from fewer provisions, markets' lift

TORONTO, Aug 19 (Reuters) - Canadian banks are set to post higher profits over the previous quarter next week thanks to a raft of government stimulus, a recovery in financial markets and setting aside less money to cover bad loans.

Year-over-year earnings will be down, but analysts and investors expect profit to be up about 45% in the three months through July from the previous quarter, the first to experience the pandemic’s hit, according to Refinitiv data.

Bank of Montreal and Bank of Nova Scotia will kick off banks’ results reporting on Aug. 25. “With the subsidies the government has put forward, we will see consumers still in good shape,” said Sadiq Adatia, chief investment officer at Sun Life Global Investments.

Wealth management and capital markets businesses were likely helped last quarter by financial markets’ continued recovery, although lower interest rates and yields remained headwinds, he added.

While provisions for loan losses will be higher than last year’s “normal” levels, they will be down from the second quarter’s C$11 billion ($8.35 billion), said Mike Clare, portfolio manager at Brompton Group.

Loan impairment increases have been delayed by extensions and expansions of government stimulus, National Bank Financial analyst Gabriel Dechaine, who sees quarter-on-quarter credit-loss provisions down about 32%, wrote in a note.

Even so, with about C$200 billion of mortgages subject to payment deferrals, Dechaine warned about a looming “default cliff.” If even 5% of these become impaired, the gross impaired loans ratio would jump to nearly double historical highs, he said.

Despite the improvement from the prior quarter, analysts expect the pandemic’s impact to drive a decline of more than third in earnings from a year ago.

Scotiabank is likely to be the worst performer as the pandemic hit Latin America, the focus of its international operations, after North America, CanAccord Genuity analyst Scott Chan wrote in a note.

Deposit growth - which jumped in the previous quarter due to government unemployment payments, a spending pullback and companies drawing down credit lines - likely slowed as businesses and debt markets reopened, Clare said.

While a housing recovery and the gradual end of lockdowns are expected to lift retail loans, that was likely more than offset by slowing commercial lending, Adatia said.

Canadian banks are up 33% from their March trough, lagging a 49% gain in the Toronto stock benchmark . ($1 = 1.3167 Canadian dollars) (Reporting By Nichola Saminather Editing by Nick Zieminski)