May 11, 2008 / 2:50 PM / 10 years ago

RPT-Bay Street Week Ahead-Big banks may get bruised again

(Repeats Friday column)

By Lynne Olver

TORONTO, May 11 (Reuters) - Most Canadian banks will show further bruises from the credit-market crunch when they issue quarterly reports in two weeks’ time, and even solid results from their domestic banking units may not be enough to match last year’s stellar earnings.

Canadian banks are widely seen as able to handle additional writedowns for U.S. structured finance investments or exposure to U.S. bond insurers, but other pressures will erode second-quarter earnings.

“Our thesis is that we’re approaching the later innings of the asset-writedown stage, and the next big headwind for the banks as a whole is going to be loan-loss provisions,” said Craig Fehr, an analyst with Edward Jones.

Concerns about further asset writedowns are already priced in to bank stocks, Fehr said, but all of the banks will have to increase the amounts they set aside for loan losses.

In retail banking, loan originations and margins likely declined, he said in an interview.

The big Canadian banks start reporting results for the February-April quarter on May 27, with Bank of Montreal (BMO.TO) and Bank of Nova Scotia (BNS.TO) kicking off this round.

Genuity Capital Markets analyst Mario Mendonca took some heart from first-quarter results posted this past week by HSBC Bank Canada, a unit of HSBC Holdings Plc (HSBA.L).

Its provisions for credit losses, although up significantly from a year ago, were little changed from the previous quarter. Not surprisingly, capital market fees declined, Mendonca noted.

“HSBC’s operating fundamentals speak to solid retail banking results for Canada’s large cap banks,” Mendonca said in a note to clients this past week.

As for potential charges, it has become a “popular sport” to guess the size of the banks’ pending writedowns for structured-credit securities, Robert Sedran of National Bank Financial said in a research note.

While a serious matter, Sedran added, “the long-term valuation impact of any future charges will likely prove fleeting.”

Canadian Imperial Bank of Commerce (CM.TO) has taken repeated hits from U.S. structured-credit positions, and issued C$2.9 billion ($2.9 billion) of new shares early this year to improve its balance sheet.

CIBC’s exposure to U.S. residential mortgage-backed securities and bond insurers could lead to C$1.5 billion of writedowns in the second quarter, on top of markdowns of more than C$4.2 billion already, RBC Capital Markets analyst Andre-Philippe Hardy said recently.

Some bank watchers are refraining from estimating possible writedowns, saying it is too difficult to predict how management will account for various illiquid debt securities.

“There will be losses,” said Blackmont Capital analyst Brad Smith. “And they’re going to continue. The good news is that so far, the level of losses for the bulk of Canadian banks has been quite manageable.”

Citigroup analyst Shannon Cowherd recently suggested that Royal Bank of Canada (RY.TO), the country’s largest bank, could take writedowns of about C$5 billion. But she lopped her estimate in half a few days later after the bank complained of errors.

Others anticipate that charges at Royal could be in the C$300 million to C$700 million range.

Writedowns aside, National Bank Financial’s Sedran trimmed his 2008 and 2009 earnings forecasts for the Canadian banks on Friday because he sees rising odds of a prolonged economic slowdown in North America.

“In that scenario, the slowing economy, funding pressure, rising provisions for credit losses and weak, market-sensitive revenues will likely weigh on earnings,” Sedran said. ($1=$1.01 Canadian) (Reporting by Lynne Olver; editing by Rob Wilson)

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