* Q4 profits seen rising around 9 pct year-on-year
* Dividend hikes could resume with NatBank increase
* Stocks could keep drifting as broader market catches up
By Cameron French
TORONTO, Nov 28 (Reuters) - Canadian bank profits should rise modestly in the fourth quarter, with gains from stronger loan revenue and better credit quality outweighing weaker wholesale banking results.
But even if the results marginally beat expectations, analysts say the stocks are unlikely to get much of a boost, despite the potential for one or two of the lenders to resume dividend hikes for the first time in two years.
Analysts polled by Thomson Reuters I/B/E/S say profits for Canada’s big six banks should rise on average about 9 percent when the lenders begin reporting on Nov. 30.
National Bank of Canada (NA.TO), the country’s No. 6 bank, reports first, followed by Canadian Imperial Bank of Commerce (CM.TO), Toronto-Dominion Bank (TD.TO), Royal Bank of Canada (RY.TO), and Bank of Nova Scotia (BNS.TO). Bank of Montreal (BMO.TO) will report results the following week.
“If you read through from what the U.S. banks were doing, you’d have to say there will be lower profits out of the trading and capital markets side,” said Gavin Graham, president of Graham Investment Strategy.
“At the same time, one would anticipate pretty strong performance from the retail side of things.”
The banks’ fourth quarter ends on Oct. 30, so it partially overlaps with the U.S. banks’ July-September third quarter.
Canada’s banks took a hit to profits during the financial crisis, but they emerged stronger than their international rivals, and shrinking provisions to cover bad loans have helped profits over the past year.
Smaller year-over-year provisions are expected to provide a cushion again, but observers say the easy profits from better loans may have almost run their course.
Loan-loss provisions are expected to fall only slightly from the third quarter.
“The drop in the loan-loss provisions, I’ve been nervous about that all along,” said John Kinsey, a portfolio manager at Caldwell Securities in Toronto.
However, results could be overshadowed by a resumption of dividend increases, a regular occurrence before the crisis.
Canada’s financial services regulator recently gave the banks the green light to resume dividend hikes given recent clarity over new global bank regulations, and analysts say one of more of the lenders may boost payouts this quarter.
National is considered the most likely of the big six to raise its dividend, as its payout ratio — the percentage of profit spent on dividends — is at the low end of its range.
Canadian Western Bank (CWB.TO), the No. 7 bank by market size, is also a good bet to raise its payout next month.
Ed Clark, Chief Executive at No. 2 lender Toronto-Dominion, has said the bank will address the issue next quarter.
While dividend increases would help the stocks, analysts say the sector could find it hard to build on recent gains unless they sharply beat earnings estimates.
The banks outpaced the broader market last year, but they have traded sideways of late, even as the S&P/TSX composite index .GSPTSE has risen about 10 percent since late August.
Some of the banks are around all-time highs and the group is near normal price-to-earnings ratios.
“We think the multiple expansion story has largely played out, so we think it’s going to come down to earnings growth, which will have to happen over several quarters,” said John Aiken, an analyst at Barclays Capital.
He expected the stocks to stagnate for about three months, before rising next year on stronger growth and higher dividends.
“In the absolute near-term, you’ve got to have the market catch up to them, because they’ve led the market for all the right reasons,” he said.
$1=$1.02 Canadian Reporting by Cameron French; editing by Janet Guttsman