At Canada's banks, the problems are all relative

Sun Mar 4, 2012 12:15pm EST
 
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By Cameron French

TORONTO (Reuters) - Canada's rock-solid banks may be facing a gloomy profit outlook, but it's one that most of their U.S. and European rivals would jump at in a Wall Street minute.

With low interest rates squeezing lending margins and heavily indebted Canadian consumers expected to curb borrowing, executives and analysts say the banks now face a shrinking upside after posting record earnings from domestic operations for their financial first quarter.

In other words, their rich profits will keep on growing, just more slowly than in the recent past.

For global rivals that are still struggling to recover from the 2008-09 U.S. mortgage crisis, or are waist-deep in the European sovereign debt mess, the Canadian banks' problems may seem trivial.

Indeed the Canadian lenders, almost by default, have been left among the strongest in the world after financial crises on both sides of the Atlantic over the past four years have turned the parameters used to evaluate banks almost on their head.

"Slowing earnings growth is probably the best problem to face," compared with what many U.S. and European banks are looking at, said John Aiken, an analyst at Barclays Capital, and typically one of the most bearish of the analysts that cover the Canadian banks.

However, within the cloistered Canadian industry - the banks are protected from takeover by government regulation and the Big 5 hold nearly immovable double-digit domestic market shares - the lower profit growth is a cause for concern, and among investors it may seem a very real reason to be cautious on the shares.

"You've been seeing (profit) growth in the mid teens, and that growth is not sustainable," said Robert Sedran, an analyst at CIBC World Markets, acknowledging that investors in the sector have been spoiled by steady returns.   Continued...