Canadian Lenders’ Investment-Banking Revenue to Fall on European Crisis

Canadian lenders including Royal Bank of Canada (RY) and Bank of Montreal (BMO) may report lower revenue from investment banking in the fourth quarter as capital markets activity slows amid the European debt crisis.

“If we start talking big European bank failures, there’s no way to completely isolate yourself from that as a financial institution in Canada,” said Robert Sedran, an analyst at CIBC World Markets in Toronto. “The biggest impact is going to be around sluggish economic growth and a lousy trading environment.”

The Standard & Poor’s/TSX Bank Index has dropped 8.9 percent this month on concern that an economic slowdown sparked by Europe will overshadow rising profits from the fiscal fourth quarter. Canada’s eight biggest lenders will probably report average profit growth of 12 percent for the quarter ended Oct. 31, according Scotia Capital analyst Kevin Choquette.

The banks begin reporting results on Dec. 1, starting with Canadian Imperial Bank of Commerce, the No. 5 bank, and Toronto- Dominion Bank (TD), the second largest. Profits will be bolstered by lower taxes and fewer provisions for bad loans, Choquette said.

Market-sensitive fees, which include revenue from capital markets and asset management, may drop 6 percent to C$5.77 billion ($5.5 billion), according to Macquarie Capital Markets analyst Sumit Malhotra. That’s the lowest level in more than a year and includes a projected 46 percent decline in trading revenue and 13 percent contraction in underwriting and advisory fees.

Stock Financing

“The big wild card with all the banks these days is profits on proprietary trading,” said David Baskin, president of Baskin Financial Services in Toronto, which oversees about C$400 million, including bank shares. “I just don’t know how you predict that.”

Canadian equity financings, including preferred shares, were $6.9 billion in the quarter, according to data compiled by Bloomberg, down from $7.6 billion a year ago. At the same time, Canadian corporate bond sales plunged by half to C$8.94 billion.

Europe’s sovereign debt crisis “does not pose a material, direct risk to Canada’s six-largest banks”, National Bank Financial analyst Peter Routledge said in a Nov. 15 note.

Canada’s banks have about $195 billion in gross exposure to Europe, of which $15.7 billion is to Greece, Ireland, Portugal, Spain and Italy, Routledge said, based on Bank of International Settlements data. Any losses to Canada’s banks from over- indebtedness of those five countries “would be immaterial to even one quarter’s earnings,” he said.

U.K. Assets

The Canadian banking system’s largest European exposure is to borrowers from the U.K., with about $88 billion in gross claims, Routledge said.

“Contagion risk becomes a concern for Canada’s banks only if the U.K. gets caught up in the broader European financial crisis.”

Toronto-based Canadian Imperial is expected to have profit before one-time items of C$1.80 a share, according to the average estimate of 16 analysts surveyed by Bloomberg News. That compares with C$1.68 a year earlier. Toronto-Dominion is expected to report profit of C$1.54 a share, a 12 percent increase.

Royal Bank, the country’s largest lender, and No. 3 Bank of Nova Scotia (BNS) will report results Dec. 2. Toronto-based Royal Bank is expected to have profit of 97 cents a share, up 15 percent. Scotiabank, also in Toronto, is expected to post profit of C$1.08 a share, a 5.9 percent increase.

Bank of Montreal, Canada’s fourth-largest lender, may have profit of C$1.31 a share when it releases results Dec. 6. That would be a 4 percent increase from the year earlier.

National Bank of Canada (NA), Laurentian Bank of Canada (LB) and Canadian Western Bank (CWB), the three smallest banks of the group, may raise dividends, analysts 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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