May 20, 2012 / 2:32 PM / in 5 years

BAY STREET-Resilient Canadian banks may go unrewarded

* Big lenders to report modest quarterly profit gains

* Acquisitions, steadiness in loans to boost earnings

* Trading revenue expected to hold back results

* Bank of Montreal first to report on Wednesday

* Greek debt crisis complicates outlook

By Cameron French

TORONTO, May 20 (Reuters) - After the dust cleared from the 2008 financial crisis, Canadian banks took stock of their balance sheets and quickly realized they had a chance to expand their foreign operations on the cheap by buying distressed banking assets.

The fruits of recent purchases combined with surprisingly strong mortgage and business loan growth should underpin stronger second-quarter profits for the big banks, offsetting the impact of slumping markets-related profits.

Even so, with investors’ eyes focused on Greece’s tenuous financial situation, it’s unlikely that even a strong quarter would give much of a boost to the banks’ stocks, and earnings misses could trigger heavy selling pressure.

“We’re in a very unforgiving market right now,” said Barry Schwartz, a portfolio manager at Toronto-based Baskin Financial Services. “If any bank does come out with a disappointing quarter, I would expect to see a large downdraft.”

Even with the shakiness of investor confidence, however, profits at Canadian banks look set to soothe, reinforcing the sector’s reputation for stability, even in times of uncertainty.

As a group, the country’s six biggest banks should post year-over-year earnings growth of about 7 percent, according to RBC Capital Markets analyst Andre-Philippe Hardy, who notes his forecasts are about 2 to 3 percentage points above the average.

“We expect year-over-year earnings-growth headwinds this quarter will include slow consumer loan growth and margin pressure, while positive drivers will likely include strong commercial loan growth and the positive impact of acquisitions,” Hardy said in a note.

Profits are expected to ease a bit from the first quarter, however, as abnormally strong trading revenue had a flattering effect in that quarter.

Dividend increases from the biggest banks are unlikely, although No. 6 lender National Bank of Canada could raise its payout.

Bank of Montreal is the first bank to report, with results due on Wednesday. Canada’s No. 4 lender is expected to report core earnings of C$1.35 a share, un changed fr om a year earlier, according to Thomson Reuters I/B/E/S.

M&A TAILWINDS

Canada’s banks side-stepped the brunt of the U.S. financial crisis, and have since used their strong balance sheets to buy assets and increase market share at home and abroad.

BMO’s $4.1 billion acquisition of Wisconsin lender Marshall & Ilsley, which closed last July, should give a big year-over-year boost to the bank’s U.S. personal and commercial profits, Toronto-Dominion Bank should also benefit from its acquisitions of the MBNA credit card portfolio, which closed in the fourth quarter of last year.

The acquisition of Wellington West in the third quarter of 2011 should boost wealth management results at National Bank of Canada, while Canadian Imperial Bank of Commerce will benefit from its purchase of a minority stake in U.S. asset manager American Century Investments in the fourth quarter.

The banks have pursued these deals amid gloomier signs for their core domestic lending businesses.

Mortgage and consumer lending, while still strong in Canada is expected to grow more slowly from now on as increasingly indebted Canadians reduce credit card volumes and show more restraint in real estate purchases.

That said, a marked slowdown has yet to happen, which has surprised experts and may point to another quarter of steady growth for the bank’s largest revenue segment. Also, commercial lending has slowly rebounded since the crisis.

“Lending growth in the personal/commercial side has been better than what I would have expected, given the state of the consumer,” said Tom Lewandowski, an analyst at Edward Jones in St. Louis.

“Looking at loan growth, I expect it to slow down domestically. The Canadian consumer in my opinion is just a little bit stretched when it comes to debt.”

OUTSIDE FORCES

Even if domestic lending does remain resilient, outside forces could pressure results and mute market gains.

Deteriorating markets - hurt by uncertainty over Europe’s sovereign debt situation and the stability of the euro zone - could erode trading revenue on both a quarter-on-quarter and year-on-year basis. The Toronto Stock Exchange’s benchmark S&P/TSX composite index is down nearly 10 percent since the end of February.

And although the banks have played down their exposure to Europe, investors will likely want more assurances on the sector’s ability to navigate the repercussions of a possible Greek exit from the 17-nation euro-zone.

“All eyes and ears will be less upon the numbers and more upon what’s going on in Europe,” Schwartz said. “We’re all on pins and needles about the euro zone.”

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