December 1, 2008 / 9:36 PM / 9 years ago

Economy, not Q4, is key question for banks

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

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.

BMO did not publish 2009 financial targets, but its top executive for domestic retail banking said loan growth would slow.

"There is no doubt, because of the higher credit costs our customers are going to be paying and the slowing economic activity that we expect, that there is going to be a slowdown in demand for loans," Frank Techar, head of the bank's Canadian unit, said on a conference call.

He added that his goal would be to increase market share in deposits, no matter the economic climate.

Competition in a softening environment might benefit consumers, Fehr said, as each bank seeks to win or hang on to market share.

The remaining five of Canada's six largest banks will report detailed quarterly results this week. Four have already provided partial results, including writedowns they plan to take.

CIBC World Markets analyst Darko Mihelic is closely watching the Canadian banks' credit provisions and capital levels.

"Early data suggests credit deterioration has only just started and could get significantly worse should the North American economy stumble more than anticipated," Mihelic wrote in a November 30 report.

Canadian Finance Minister Jim Flaherty, whose government is mired in a serious political battle with opposition parties, forecasts an economic contraction in the fourth quarter and first quarter of 2009.

Canadian employment has grown overall in 2008, but the tone could change on Friday, when November jobs data will be released. According to a Reuters poll, analysts expect that the Canadian economy lost 25,000 jobs in November and the unemployment rate rose to 6.4 percent, from 6.2 percent. (That is still near a 30-year low, and about half the 12.1 percent unemployment rate of late 1992.)

Banks and analysts consider the jobless rate a key indicator of consumer and business appetite for loans -- and of the ability to repay existing loans.

"As we have watched this crisis unfold, we have come to pay more attention to what is happening to such indicators as U.S. and Canadian unemployment than to what the U.S. Treasury announces," Genuity Capital Markets analyst Mario Mendonca said in a research note on Monday.

"We are inclined to believe that after a two to four-week rally in financials, the real economy will again remind us that people without jobs do not pay their bills."

The Canadian housing market is another weak spot, although nowhere near as bad as in the United States. Canadian residential property sales fell 14 percent from September to October, the biggest drop since June 1994.

That suggests "a major downshift in consumer psychology," the Canadian Real Estate Association has reported.

Against this backdrop, Bank of Nova Scotia will issue full fourth-quarter results on Tuesday.

Canadian Imperial Bank of Commerce, Toronto-Dominion Bank and National Bank of Canada are due to follow on Thursday, with Royal Bank of Canada, the country's largest bank, wrapping things up on Friday.

Reporting by Lynne Olver; Editing by Frank McGurty

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