Bank earnings: Don't expect much

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Has the U.S. banking sector been outperforming Canada's? That's the read of some analysts who aren't expecting strong first-quarter results from Canada's six biggest players, who will be reporting over the next two weeks.

Canadian banks received global accolades during the financial crisis for their performance and stability, but right now there's not a lot driving their growth and the chance of any dividend hikes looks weak.

The fat profits that they enjoyed from trading and securitization deals during the liquidity crisis have plummeted and low rates are hurting their net interest income. In addition, uncertainty about the shape of new global banking regulations hangs over each of them, even as they boast financial cushions, in the form of Tier 1 capital ratios, that are among the best in the world.

U.S. banks have seen their trading revenue fall more than 50 per cent recently, and it's unlikely Canadian banks will escape the trend, says John Aiken, an analyst with Barclays Bank PLC.

During the fourth quarter, trading generated as little as 9 per cent of overall revenue at Bank of Montreal, and as much as 17 per cent of revenue at Royal Bank of Canada. A 10-per-cent decline in trading revenue will translate into a 2-per-cent drop in share profit for BMO and a 5-per-cent dip for Canadian Imperial Bank of Commerce, Mr. Aiken calculates.

These shortfalls look to be partially offset by lower provisions for loan losses as the economy improves. But even banking executives themselves have recently said that the amount of soured loans will likely peak by April and the amount of money that the bank sets aside to cover troubled loans will remain elevated through the first half of the year.

Perhaps the greatest unknown remains the set of new capital requirements in the works by the Basel Committee on Banking Supervision, a global forum on banking supervisory matters. Any move to force the banks to retain greater levels of capital would affect profitability, analysts say.

"With the banks' operating environment still battling the tepid pace of economic growth and capital rules now 'up in the air,' capital accumulation (and its negative impact on profitability) will likely continue in the near term, meaning acquisitions, share buybacks, and dividend increases are not likely until the latter half of 2010 at the earliest," Mr. Aiken wrote in a recent report.

U.S. banking giants JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. all recently reported continuing losses for their lending operations during the fourth quarter. But some of the major U.S. players have managed to show growth in revenue and profit based on weak comparables from the year-earlier period.

Tomorrow, CIBC and National Bank of Canada will kick off the first-quarter earnings season in Canada followed by BMO, RBC and Toronto-Dominion Bank next week. Bank of Nova Scotia will close the show on March 9.

Analysts expect that the banks will show growth in their domestic retail banking businesses, spurred by home mortgages. Loans to businesses are likely to be flat or declining and revenue from initial public offerings, mergers and acquisitions, and new debt issuers is expected to be weak.

"Our 2010 outlook for revenue growth is not as robust as 2009. Bank management will have to contend with uneven asset growth, continued low levels of interest rates, and more normalized conditions within trading and securitization businesses," wrote James Bantis and Adam Chan of Credit Suisse First Boston Securities Canada Inc.

They think that investors have already priced in declining credit losses for the banks and say expansion for the sector is on hold until there is greater clarity on global banking reform and dividend policies.

"With regards to the prospects of common dividend increases, we would not expect such announcements in the near-term," they said. "Bank management have rightly remained focused on dividend payout ratios and will wait until earnings growth places a bank in the lower end of its payout ratio range for a sustainable period before [their]boards seriously consider a dividend hike."

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Canadian banks at a glance

First-Quarter Bank Forecast Summary

Canadian banks continue to be among the most stable in the world. But market trends appear to be squeezing growth and profitability.