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TORONTO (Reuters) - A volatile year for Canadian banking results is likely to end on a soft note, and the outlook for 2012 won't inspire confidence as Europe's debt troubles deepen and Canadian borrowers turn shy.
Analysts expect percentage year-over-year profit gains in the mid-to-high single digits when the country's big banks begin reporting this week. On a quarter-to-quarter basis, profits are expected to drop from the third quarter.
Even so, with bank shares already at year-lows, even modest results could spark buying pressure, particularly if one or more of the banks raise dividends.
Toronto-Dominion Bank (TD.TO) and Canadian Imperial Bank of Commerce (CM.TO), the nation's second- and fifth-biggest lenders, are first in line to report for the fourth quarter, with results due early on Thursday.
Volatile financial markets will likely steer the results in the most recent quarter, just as they have so far this year.
"I think it's fair to say the capital market side of the business is going to be lackluster," said Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier in Toronto.
The S&P/TSX composite index .GSPTSE is down nearly 20 percent from the year-high reached in March, and recent results for U.S. and European banks, whose third quarter overlaps with the August-October fourth quarter of the Canadian lenders, were hurt by weaker capital markets revenues.
Falling trading fees, and weak underwriting and advisory activity should weigh on results, too. Analysts see only slim growth in wealth management income, a growing focus for several of Canada's top six lenders.
National Bank of Canada (NA.TO), with one of the highest weightings of capital markets revenue, is the bank most likely to show zero growth, according to analysts. TD, which is most highly geared to retail banking, is expected to show double-digit profit growth.
The markets-related weakness should be offset by revenue from business and mortgage lending, which should grow despite razor-thin interest rate margins.
RBC Capital Markets analyst Andre-Philippe Hardy said stronger business-loan growth and lower loan losses should drive revenue in the business line that makes up the bulk of revenue for the banks.
However, mortgage growth is expected to slow next year, and Hardy sees investors quickly looking past the fourth-quarter results once they're released.
"In light of the recent market volatility and slowing economic growth, we expect bank commentary on the outlook for 2012 to have a greater impact on share prices than reported earnings relative to expectations," he said in a note.
CIBC World Markets analyst Robert Sedran expects full-year per-share earnings to rise a slim 4.4 percent in 2012, down sharply from his expected 12.3 percent for 2011.
Analysts also expect banks to reveal more about any exposure to Europe, where the sovereign debt crisis is spreading.
"I think the direct exposure is relatively minimal," said Gavin Graham, president at Graham Investment Strategy.
"The real problem for the North American banks is the knock-on effect in the event we get a sort of Lehman-style freeze up in interbank lending," he said, referring to the 2008 collapse investment bank Lehman Brothers.
Setting that aside, he said the recent pressure on the bank stocks could subside once results are released, particularly if the banks raise dividends again.
Shares of TD, Bank of Nova Scotia (BNS.TO), and National Bank dropped to their lowest level in more than a year on Friday, while Royal Bank of Canada (RY.TO) touched its lowest in more than two years.
After putting dividend increases on hold in 2008, Canadian banks began to resume raising payouts a year ago, and now all have done so except for Bank of Montreal (BMO.TO), which instead directed its capital toward its $4 billion acquisition of Wisconsin bank Marshall & Ilsley.
"They got a (pass) because they had a big takeover," Graham said. "But now you have to think there would be an indication from management that if they don't do it now they are looking at raising it in the next few quarters."
Other banks that analysts say may be due for dividend increases this quarter are Scotiabank and National Bank.
Reporting by Cameron French; Editing by Frank McGurty