Canada's banks may face difficult year

Thu Jan 5, 2012 5:11pm EST
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By Cameron French

TORONTO (Reuters) - Global economic headwinds may finally have caught up with Canada's banks, a haven of stability over the past few years in an otherwise turbulent global financial industry.

On Thursday, one of the country's top financial industry analysts downgraded Canada's financial sector and predicted that three top lenders will actually see their shares decline in 2012.

The grim outlook portends a shift for a bank sector that emerged from the 2008 financial crisis in much stronger shape than its counterparts in other markets around the world. Indeed, the country's lenders have been named the world's soundest by the World Economic Forum for four straight years.

While nobody's calling for the kind of turmoil that's hit lenders in the United States and Europe over the past three years, Barclays Capital analyst John Aiken sees an end to the double-digit profit growth that has made the sector a safe haven for investors spooked by rocky markets.

"The fact that we're looking for modest share price declines in the Canadian banks doesn't mean that we're negative on the group as a whole, but what you've got to keep in mind is that their earnings are slowing after two years of pretty strong relative performance," Aiken said in an interview.

While Canada's banks managed to churn out strong profits during what was expected to be a challenging 2011, analysts expect reduced consumer debtloads and narrow interest margins to weigh on revenue growth in 2012.

Meanwhile, Europe's debt crisis, while not seen as a direct threat for any of the Canadian lenders, puts pressure on stock valuations, Aiken said.

He lowered his rating on the Canadian financial sector - which is dominated by the banks, but also includes insurers and asset managers - to "neutral" from "positive."   Continued...