Banks could rain on earnings parade

By Scott Anderson

TORONTO (Reuters) - Strong results from some of Canada's key companies could take a back seat to ongoing turmoil in financial markets as the second-quarter reporting season gets under way.

Commodity-based companies -- oil and gas, agriculture and mining -- are expected to fare reasonably well this reporting season, but those connected with the Toronto Stock Exchange's heavily weighted financial sector are likely to experience a rougher ride.

"The way the market is reacting right now, I don't think people are as concerned about earnings as they are about the health of financial institutions," said Ian Nakamoto, director of research at MacDougall, MacDougall and MacTier.

"Earnings will be overshadowed by what is going on in the financial services area. But having said that, it's going to be asymmetrical. Companies that meet or beat their earnings (forecasts) may just stay still, while companies that miss will probably be severely punished."

That was evident earlier this week when Nexen Inc (NXY.TO: Quote) dropped 11 percent after its quarterly numbers didn't live up to analysts' lofty expectations.

Some Canadian banks are struggling to shrug off the fallout from the U.S. mortgage-inspired credit crunch, with Canadian Imperial Bank of Commerce (CM.TO: Quote) and Royal Bank of Canada (RY.TO: Quote), in particular, expected to report sizable writedowns.

"The ripple effects from the financials into the real economy are beginning to be felt," said Michael Sprung, president at Sprung and Co Investment Counsel.

Financial institutions, which account for about 30 percent of the Toronto market's main index, are expected to deliver mixed results -- ranging from low single-digit profit increases to low double-digit increases.