Analysts are expecting Canadian banks to produce weak fourth-quarter results, and are pointing to rough going in the banks' investment banking and trading businesses as a big reason.
The banks are gearing up to report results for the last quarter of their fiscal year, which ended on Oct. 31, and analysts are rolling out their previews of the numbers.
"One has to expect a bad, ugly, horrible quarter," said Rob Sedran, who covers banks for CIBC World Markets.
Fixed income trading numbers are down around the world, thanks to paralysis in markets resulting from the European crisis, and equities have been hammered as well. Fee-generating deal activity, from equity offerings to mergers, has also suffered.
Results from Canada's independent brokerages, Canaccord Financial and GMP Capital , have given a hint of what's to come and it's not pretty.
Some estimates have capital markets revenue for the big Canadian banks dropping 10 per cent from the third quarter, which is prompting at least one analyst to question whether it's time for the banks to start cutting traders and bankers.
RBC's Andre-Philippe Hardy expects revenues for the big banks' brokerage divisions to be down 10 per cent from the third quarter, "which is in line with trends seen in U.S. and European investment banks' recent quarterly results."
Compared with the fourth quarter of 2011, he expects revenue to be down 14 per cent.
Mr. Sedran is expects capital markets revenue will be down 7 per cent from the third quarter and 19 per cent year over year. (Mr. Sedran's numbers aren't comparable with Mr. Hardy's because Mr. Hardy doesn't include an estimate for RBC , which has the biggest capital markets business.)
Mr. Sedran predicts that trading revenue at RBC and Bank of Montreal could drop 11 per cent from the third quarter. National Bank of Canada could be even harder hit, with Mr. Sedran predicting a drop of almost 13 per cent in trading revenue.
Given the revenue outlook, Canadian banks will have to look at cutting employee costs, said John Aiken, the Canadian banks analyst at Barclays Capital. Fourth-quarter results are generally riddled with charges and special items, so it's not a bad time to announce such things as investors tend to ignore them.
"Headcount reductions in the fourth quarter remains conceivable," he wrote.
The Canadian banks have been hiring in capital markets, even as revenues have sagged. "We believe that rising employment levels for the 'Big 6' have decoupled from the declining capital markets revenues," he wrote.