May 25, 2009 / 1:51 PM / 9 years ago

Canada banks seen benefiting from stronger markets

* Profits seen, but down from Q1 and year-ago

* Credit losses, thin interest income hurt earnings

* Trading income expected to be a positive

By Andrea Hopkins

TORONTO, May 25 (Reuters) - Canadian banks are set to report another profitable quarter this week, defying global trends, as a market recovery early in the year offsets rising loan losses and thin income from interest and fees.

The performance of Canada’s Big Six banks is expected to slip from the relative high-water mark of the first quarter as credit deteriorates and lending growth slows.

Even so, trading income was a bright spot, and analysts said anyone who has been watching global financial firms struggle will likely be impressed by Canada’s banking resilience.

“I think what they’ll see is a very profitable sector in one of the worst downturns that we’ve seen in recent memory, perhaps since the Depression,” said Robert Sedran, a banking analyst at National Bank Financial.

“When you look at the world right now, the fact that the Canadian banks stand on their own, with no government capital injected into them, the fact that they are still making money ... I think is a noteworthy positive.”

The country’s banking system was ranked last year as the world’s soundest by the World Economic Forum, and analysts said Canada’s conservative lending practices, strong capital and receding write-down risks remain their biggest strengths.

Canada’s Big Six lenders — Royal Bank of Canada (RY.TO), Toronto-Dominion Bank (TD.TO), Bank of Nova Scotia (BNS.TO), Bank of Montreal (BMO.TO), Canadian Imperial Bank of Commerce (CM.TO) and National Bank of Canada (NA.TO) — report results between May 26 and May 29. Two smaller banks, Laurentian Bank of Canada (LB.TO) and Canadian Western Bank (CWB.TO), report on May 27 and June 4, respectively.

While analysts expect earnings per share for the eight banks to fall by between 12 percent and 21 percent from year-ago levels — and by a similar margin from the first quarter — fears of dividend cuts have receded.

Negatives remain, however.

Credit deterioration is the top concern for most banks. Rising unemployment, falling house prices and more bankruptcies mean bills don’t get paid — including the credit card balances, auto loans and mortgages held by banks.

As a result, banks are setting aside more money to cover bad loans, known as provisions for credit losses.

“There’s been thousands of jobs lost on both sides of the border and it takes time to work through the system. So even though we’re starting to see some positive signs within the economy, the credit quality of the banks’ loan portfolio is going to deteriorate for some more time,” said John Aiken, an analyst at Dundee Capital Markets.

Lending margins are also expected to be flat. Banks make money when they can borrow money more cheaply than they lend it. But with official interest rates at record lows, that margin has been squeezed, and competitive pressure between the banks to find new loans means every bank is making less money on the loan growth they do have.

But some positive factors will ensure the nation’s big lenders show a profit.

Market-sensitive revenue — the money banks from trading and investment banking deals — is expected to be lower than in the first quarter but above the year-ago period, according to Macquarie Research analyst Sumit Malhotra.

“We see the collection of capital markets and wealth management fees totaling C$6.1 billion ($5.4 billion) for the industry, up 18 percent year-over-year,” Malhotra said in a research note.

Some write-downs are expected in the quarter. Royal Bank has already warned it expects to write down US$850 million of goodwill, and Aiken said “it would not be a complete surprise” if BMO and TD also write down goodwill to reflect the impact of their large U.S. operating units.

Still, the goodwill impairment has mostly been shrugged off as an accounting adjustment that does not affect the banks’ comparatively healthy capital ratios, which remain above 10 percent.

$1=$1.13 Canadian Reporting by Andrea Hopkins; Editing by Frank McGurty

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