Canada Banks May Defy Economic Slowdown With Earnings Growth

Canadian banks, ranked the soundest in the world, may post a fourth-straight quarter of profit growth as improved credit quality helps offset the economic slowdown that’s hindered growth at some global lenders.

The country’s eight biggest banks, which begin reporting results tomorrow, may increase profit by 14 percent before one- time items, Scotia Capital analyst Kevin Choquette said.

“Our banks’ asset quality is good, the management is good and I think we’re just in a lucky circumstance,” said David Baskin, president of Toronto-based Baskin Financial Services, which owns bank shares among its C$400 million ($404.6 million) in assets. “We just happen to be in the right place at the right time.”

The profit growth for the period ended July 31 contrasts with European banks including Royal Bank of Scotland and UBS AG, where profit declined in the most recent quarter. For U.S. lenders, analysts at Deutsche Bank AG said this month earnings estimates may need to be slashed by as much as 30 percent if economic growth slows to 1 percent or less.

Still, a slowdown in the pace of Canadian job creation last month suggests Canada’s labor market may be softening, crimping bank earnings in subsequent quarters. The 10-member S&P/TSX Banks Index declined 6.7 percent this month as global equities fell on the concern that the U.S. may slip into recession. Bank of Nova Scotia plunged 6.7 percent last week, the biggest weekly decline in more than two years.

Photographer: Brent Lewin/Bloomberg

Bank of Montreal, the country’s fourth-largest lender, is the first bank to release results tomorrow. Close

Bank of Montreal, the country’s fourth-largest lender, is the first bank to release results tomorrow.

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Photographer: Brent Lewin/Bloomberg

Bank of Montreal, the country’s fourth-largest lender, is the first bank to release results tomorrow.

Bank Stocks Fell

Six of Canada’s eight largest banks fell today in trading on the Toronto Stock Exchange, led by a 3.6 percent decline for Canadian Western Bank. (CWB) Bank of Montreal (BMO) was unchanged at C$57.35 at the 4 p.m. close of trading.

Canadian lenders face “challenges” from a slowdown in loan growth and increased competition, said Sumit Malhotra, an analyst at Macquarie Capital Markets in Toronto.

“While it might not be 2008, the fact that the TSX Bank Index has retrenched” indicates “things are not exactly ideal for the banks,” Malhotra said in an Aug. 16 note.

Though Canada’s economy probably slowed in the second quarter, the Bank of Canada forecast a rebound in the current period, as capital spending rises. The world’s ninth-biggest economy is expected to expand 2.8 percent this year, compared with 1.8 percent in the U.S., according to Bloomberg estimates.

Canadian Finance Minister Jim Flaherty said Aug. 19 that economic growth probably slowed in the second quarter, though strains in the U.S. and Europe haven’t changed his fiscal projections for the year, or his plans to balance the budget by 2014.

‘Good Financial Positions’

The banks “have very good financial positions,” said John Kinsey, a money manager at Caldwell Securities Ltd. in Toronto, which manages about C$1 billion, including bank shares.

Credit quality will be relatively strong as provisions for credit losses decline by an average of 8.6 percent from the year-earlier, CIBC World Markets analyst Robert Sedran said.

The value of completed takeovers involving a Canadian company surged 70 percent to $69.6 billion in the quarter, according to data compiled by Bloomberg. Equity financings in Canada rose 32 percent to $10.7 billion in the period, helping boost investment-banking fees.

Toronto-Dominion, Bank of Nova Scotia (BNS) and Canadian Imperial Bank of Commerce may announce quarterly dividend increases, according to Bloomberg Dividend Forecasts, which had a 77 percent accuracy rate in the first quarter. A projected 3.4 percent boost to CIBC would mark the lender’s first increase in more than three years.

Bank of Montreal

Bank of Montreal, the country’s fourth-largest lender, is the first bank to release results tomorrow. The Toronto-based lender may report profit before one-time items of C$1.34 a share, according to Canaccord Genuity analyst Mario Mendonca. That would be an 18 percent increase from the year-earlier period.

National Bank, the sixth-largest lender, reports Aug. 25. The Montreal-based bank may say profit rose 9 percent to C$1.72 a share, Mendonca said.

Royal Bank of Canada (RY), the largest bank, may post a 21 percent gain in adjusted profit, which excludes a C$1.6 billion loss from the sale of its U.S. consumer bank, said Mendonca, who has an estimate of C$1.05 a share.

Scotiabank, the third-largest bank, may have profit of C$1.13 a share, up 14 percent, when it releases results Aug. 30. CIBC, the No. 5 bank, may increase profit by 7.8 percent to C$1.79 a share when it reports Aug. 31.

Toronto-Dominion may post profit of C$1.60 a share, a 12 percent increase, when it reports Sept. 1, Mendonca said.

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

To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net; David Scheer at dscheer@bloomberg.net

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