TORONTO (Reuters) - Many Canadians blithely ignored warnings about record debt levels and kept borrowing this winter and that should underpin a strong performance by the country's banks, with quarterly profits seen in line with blockbuster results a year earlier.
Indeed a long-awaited slowdown in lending probably won't come under later this year. But just the prospect of a slowdown should be enough to keep a lid on the sector's shares even if the banks report strong fiscal first-quarter results starting next week.
"What you're going to see is it will be a decent quarter when you look at capital markets revenues and loan growth," said Brian Klock, San Francisco-based analyst at Keefe, Bruyette & Woods. "But we kind of think the forward-looking commentary from the (bank conference calls) are going to be more important."
For more than a year analysts have predicted a marked slowdown in consumer loan growth, but it has yet to materialize.
Despite warnings from Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty that household debt is hitting dangerous levels, Canadians are still borrowing, drawn by near record-low interest rates.
Last week, the central bank warned again about rising household borrowing, which has put Canada's average debt-to-income ratio at 153 percent, above that of the United States.
"There's a disconnect between what the policymakers want the Canadian consumer to do and what the Canadian consumer is willing to do," said John Aiken, analyst at Barclays Capital.
The banks, meanwhile, have done little to discourage the borrowing spree.
In mid-January, Bank of Montreal (BMO.TO) surprised the market when it chopped its five-year mortgage rate to a record low 2.99 percent. The move, offered for a two-week window, prompted the bank's rivals to do the same.
Those rates likely "pulled forward" quite a bit of mortgage growth into the first quarter, analysts said.
BMO, Canada's oldest bank, is first up and will release results on Tuesday.
Analysts expect the bank, Canada's fourth-largest, to earn C$1.38 a share, up from a year-before C$1.32, according to Thomson Reuters I/B/E/S.
Toronto-Dominion Bank (TD.TO), which like BMO has an extensive U.S. branch network to complement its Canadian operation, is also expected to post a slight year-over-year increase in earnings per share, as are Bank of Nova Scotia (BNS.TO) and National Bank of Canada (NA.TO).
Some analysts, however, have more pessimistic views on the results outlook.
National Bank Financial analyst Peter Routledge, for instance, expects all but BMO to report lower core EPS, due in part to an unfavorable comparison with the first quarter of 2011, when the banks blew past estimates due to unexpectedly strong retail loan growth and capital markets revenue.
Compared with the fourth quarter of 2011, however, EPS should grow, analysts say.
While markets-related results are expected to retreat year-over-year, they should be considerably stronger than those of the previous quarter.
The Toronto Stock Exchanges main S&P/TSX composite index .GSPTSE rose just under 2 percent in the quarter, recovering from a November slide with a 4 percent rise in January, likely giving a boost to the banks' trading revenue and advisory fees.
"We expect a sequential improvement in investment banking businesses as well as fixed-income trading business from depressed levels in (the fourth quarter) as macro conditions improved," RBC Capital Markets analyst Andre-Philippe Hardy said in a note.
While bank shares have risen along with the market since late last year, they are still well below where they were trading a year ago.
Analysts say the outlook for slim loan growth, combined with unpredictable markets revenue, mean the shares still may not be a great buy at this point despite what should be relatively strong results for the banks.
"If we think that margins are going to be tightening because of the competition and now volumes are going to tighten and maybe even start to shrink, then I think you're going to see those (price to earnings) multiples contract," Klock said.
One thing that could trigger a jump in the shares of one or more of the banks would be a dividend hike.
While each bank except BMO has raised its payout at least once in the past year, the pace of increases has begun to slow, Aiken said.
He said the only candidate for a hike this quarter is TD, but added that that is not a "high conviction" call.
He expects BMO, which instead of raising dividends directed capital towards last year's acquisition of Wisconsin bank Marshall & Ilsley, to raise its payout late in the year.
Editing by Jeffrey Hodgson and Peter Galloway