Nov. 20 (Bloomberg) -- Bank of Montreal and Canadian Imperial Bank of Commerce probably will lead the biggest quarterly profit decline for Canadian banks since 2002, forcing some to freeze dividends and scrap forecasts for 2009.

Canada's six main lenders will post an average profit decrease of 13 percent because of lower capital-markets fees and higher provisions for bad loans, said TD Newcrest Inc. analyst Jason Bilodeau. The banks begin reporting fiscal fourth-quarter results on Nov. 25, starting with Bank of Montreal.

``Their investment banks are not performing up to snuff,'' said Douglas Davis, president of Toronto-based Davis-Rea Ltd., which manages about $325 million and holds bank shares. ``They'll have higher loan losses and they will be still making adjustments for whatever problems they may have in the U.S.''

Lenders may also report higher debt writedowns after Bank of Nova Scotia announced an C$890 million ($719 million) pretax charge Nov. 18 to reflect plunging values for investments. That cost adds to C$11.6 billion recorded by Canadian banks since the third quarter of 2007.

``We would be extremely surprised if other banks are not also materially impacted,'' Desjardins Securities analyst Michael Goldberg wrote yesterday in a note to investors.

Mergers Plunge

Mergers and equity financings have plunged during the worst global credit crisis since the Great Depression, reducing investment-banking fees in Canada. Stock sales and takeovers are at a four-year low for the first nine months of 2008, according to Bloomberg data.

``Capital markets are going to be very weak,'' said Ian Nakamoto, director of research at MacDougall, MacDougall and MacTier Inc. in Toronto, which oversees about $3.7 billion in assets, including bank shares.

As the global economy slides into a recession, growth in Canada will slow to 0.6 percent this year, the lowest since 1991, the Bank of Canada said last month. Sales of existing homes had their biggest one-month decline in more than a decade in October. The economic slump may force the six biggest banks to set aside C$1.47 billion for bad loans, 80 percent more than a year ago, Bilodeau said in a Nov. 13 note.

Bank share prices have also plunged. The Standard & Poor's/TSX Banks Index has fallen 27 percent this year, and hit a four-year low yesterday. Bank of Montreal is the worst performer this year among the six biggest banks, down 33 percent, followed by CIBC, down 32 percent.

Freeze Dividends

The declining profits may prompt all six banks to freeze their dividends for the first time in six years, according to Bilodeau and Goldberg. Canadian banks typically raised their payouts every second quarter before 2008. This year, only Toronto-Dominion Bank and Scotiabank have increased payouts.

``They would all be very prudent not to increase their dividends,'' Davis said. That way, ``they can build their capital base and be more secure.''

Royal Bank, Toronto-Dominion and Bank of Montreal are among the lenders that have said they're unlikely to meet 2008 profit targets. The profit outlook is so murky, some banks may not provide forecasts for the fiscal year that began Nov. 1, said analyst Mario Mendonca at Genuity Capital Markets in Toronto.

``It's going to be harder to do, and some of the banks just won't do it at all,'' Mendonca said in an interview. ``There's way too many moving parts this year, so I wouldn't be too harsh on any of them if they didn't do it.''

Bad Loans

Bank of Montreal may post a 21 percent decline in profit, excluding some items, on rising credit costs and bad loans, according to Bilodeau. Bank of Nova Scotia, scheduled to release results on Dec. 2, may say that earnings fell 7 percent, the analyst said. His forecast excludes the writedown announced this week.

Canadian Imperial, the fifth-biggest bank by assets, may report a 31 percent profit drop on Dec. 4, he said. CIBC may write down as much as C$2 billion for investments tied to the U.S. housing market, adding to C$7.55 billion already recorded by the bank.

Also scheduled to report Dec. 4 are Toronto-Dominion, whose earnings may be little changed, and National Bank of Canada, which may post a 7 percent drop, Bilodeau predicted. Royal Bank, the country's biggest bank, releases on Dec. 5, and may say profit fell 12 percent.

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net; Sean B. Pasternak in Toronto at spasternak@bloomberg.net

Last Updated: November 20, 2008 00:01 EST