Economy, not Q4, is key question for banks

Mon Dec 1, 2008 4:32pm EST
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By Lynne Olver

TORONTO (Reuters) - Most Canadian banks left little to the imagination with recent quarterly profit warnings, so an obvious question hangs in the air: how much will a recession ding next year's numbers?

The focus is shifting from how the credit crunch hurt the banks' U.S. loan books and capital markets businesses, to how their basic banking operations will manage through a downturn.

Specific loan-loss provisions at banks, which have jumped in recent quarters, may move even higher as the country slips into recession, as is widely expected.

"Earlier in 2008, people said let's look ahead to 2009 earnings because that will be more of a normalized year," said Craig Fehr, an analyst with Edward Jones.

But that isn't shaping up to be the case.

"I think it's going to be much more difficult for any one Canadian bank to really sidestep the issue of loan-loss provisions," Fehr said.

"This credit-quality issue is going to put a lot of pressure on earnings growth for 2009 ... and asset growth will be a bit more challenged."

Bank of Montreal, the only big bank to report full fourth-quarter results so far, said its profit rose 24 percent in the three months that ended October 31, led by a 19 percent profit increase at its Canadian retail bank.   Continued...

<p>A sign displaying TSX information is seen in Toronto, November 20, 2008. REUTERS/Mark Blinch</p>