August 22, 2011 / 11:19 AM / 6 years ago

RPT-BAY STREET-Canada bank profits to rise, but growth uncertain

(Repeats Aug. 21 column without changes)

* Capital markets, lower loan losses to drive profits

* Slim interest margins raise concern on future growth

* Bank of Montreal to kick off results on Tuesday

By Cameron French

TORONTO, Aug 21 (Reuters) - While rising capital markets and lower loan-loss provisions will probably lift quarterly results for Canada’s banks, slim revenue growth is stirring concerns about the months ahead.

Pricing competition, combined with a prolonged period of low interest rates, has pinched their core personal and commercial lending businesses. It is not at all clear how the banks will make up for the slack in the current economic climate.

“The opportunities for revenue growth, particularly on the traditional banking side of things, are slowing, and that will have an impact on them,” said Craig Fehr, an analyst at Edward Jones in St. Louis, Missouri.

Even so, the quarterly financial reports are unlikely to drive Canadian banking shares too forcefully. The stocks have already wilted on fears of a U.S. recession and the European debt crisis.

Indeed, the sector is likely to keep rising or falling on the global outlook even through Canada is in much better shape than its huge neighbor to the south.

“The macro concerns remain the driving force behind these shares,” said CIBC World Markets analyst Robert Sedran.

Canada’s banks have enjoyed rock-solid market positions on their home turf, where economic growth is expected to be steadier than in the United States or Europe.

Their strong position allowed them to skate through the last financial crisis without requiring bailouts, and concerns about their profit growth pale in comparison to concerns about the U.S. and European financial sectors.

The U.S. Federal Reserve’s pledge to keep interest rates steady for two years should pressure margins, but the increasingly gloomy global economic outlook is not likely to hit business lending in Canada.

SEASON STARTING

Bank of Montreal BMO.TO, the country’s fourth-largest, will kick off the banks’ third-quarter reporting season on Tuesday.

On a year-over-year basis, percentage gains in core profit are expected, on average, to be largely be in the mid-teens, ranging from a 9 percent rise for No. 6 lender National Bank of Canada NA.TO to a 25 percent upswing for No. 1 Royal Bank of Canada RY.TO, according to Thomson Reuters I/B/E/S.

The numbers will benefit from the flattering effect of the 2010 third-quarter results that were pulled down by weak trading revenues, as well as higher loan-losses provisions than are expected this year.

Provisions soared in the wake of the 2008 financial crisis, but have come down as the economy has healed, giving a cushion to bank profits over the last several quarters.

Canadian Imperial Bank of Commerce CM.TO and RBC are expect to benefit to the greatest degree, though observers say the profit boost from improving credit may have almost run its course.

“That can only go on for so long, but I think we have another quarter where (lower provisions) can continue,” said John Kinsey, a portfolio manager at Caldwell Securities in Toronto.

DEFENSIVE PLAYS

Compared with their second quarter, profits for most of the banks are expected to be flat to slightly higher. Capital markets profit, while expected to be higher year-over-year, is seen falling from the second quarter.

A C$1.6 billion reduction in net profit from RBC’s sale of its U.S. retail bank to PNC Financial Services Group PNC.N in June, will mar the results for the country’s top bank.

Analysts have said the sector is a good defensive space to wait out the current market swoon, although the shares have hardly been immune to the broader weakness.

The S&P/TSX financials sector is down more than 10 percent since July 22, pacing the broader market.

$1=$0.99 Canadian Reporting by Cameron French; Editing by Frank McGurty and by Rob Wilson

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