BAY STREET-Canada bank profits seen higher again in Q2

* Q2 profits seen rising, but expectations high

* Analysts divided on value given rise in bank stocks

* Bad loan provisions easing, but C$ strength hurts

* Capital guarded, but more acquisitions seen

By Andrea Hopkins

TORONTO, May 23 (BestGrowthStock) – Canada’s stalwart and sturdy
banks are set to report another string of strong profits in the
second quarter — and that just may be the problem.

With credit losses easing, Canada’s biggest lenders are
expected to impress again as they unveil results. But as global
uncertainty takes a bite out of stock markets, even Canadian
banks may find it hard to live up to the hype.

“Expectations have just gotten very, very high for the
banks and that’s probably the biggest headwind to stocks in the
near term,” Edward Jones analyst Craig Fehr said, forecasting a
third straight quarter of strong bank earnings.

Canada’s Big Six banks have mostly exceeded expectations in
recent quarters. They have boasted strong returns and a steady
stream of small acquisitions, even as international rivals
struggle to regroup from the global financial crisis.

Signs are good for profit growth in the quarter that ended
April 30. Loan losses are ebbing as the economy improves, and
segments like wealth management and even trading are stronger
or still solid.

But headwinds include the stronger Canadian dollar, which
erodes the value of earnings from growing U.S. operations.

The outlook for profits, and investor sentiment, could also
take a hit if Europe’s debt crisis worsens and pulls down
global growth.

Bank of Montreal (BMO.TO: ) reports results on Wednesday,
while Canadian Imperial Bank of Commerce (CM.TO: ), Royal Bank of
Canada (RY.TO: ), Toronto-Dominion Bank (TD.TO: ) and National Bank
of Canada (NA.TO: ) report on Thursday. Bank of Nova Scotia
(BNS.TO: ) caps the earnings season June 1.

For some, the steady-as-she-goes performance relative to
global peers is just the reason to invest in the banks’ shares,
even though some have just come off all-time highs and dividend
increases are thought to be several quarters away.

“Investors should absolutely be investing in Canadian
banks,” said Barclays Capital bank analyst John Aiken. “With
significantly less exposure to Europe and the additional
weakness in the U.S. economy … you’ve got very strong
downside support.”

Relief from more than a year of huge credit losses will
also allow the banks’ fundamental strengths — from
money-making domestic operations to still-solid trading
revenues — to shine, Fehr said.

“For many quarters now, the Canadian banks have been
performing well, but that’s been masked a bit by stubbornly
high provisions,” Fehr said, referring to the amount of money
set aside to cover loans that went bad during the recession.

“As provisions tail off, that will unmask some of the core
earnings,” Fehr said.

Forecasts for growth in core cash earnings per share in the
second quarter range from 6 percent to 17 percent from a year
earlier, analyst reports show.

“We think that positive year-over-year drivers in domestic
retail divisions — stronger wealth management earnings, robust
growth in consumer-related loans and mortgages, higher net
interest income margins and lower loan losses — will more than
offset the translation impact of a stronger Canadian dollar and
flat wholesale earnings,” RBC Capital Markets analyst
Andre-Philippe Hardy wrote in a research note.

MORE ACQUISITIONS TO COME?

But while profit growth seems certain, analysts disagree
whether the stocks are a good buy right now, given that prices
have already had a strong run-up. Still, a recent willingness
to make acquisitions despite regulatory uncertainty has
foreshadowed long-term growth prospects.

“Now is an exciting time for Canadian banks. We have
already started to see some cross-border acquisitions, namely
FDIC-assisted deals. We expect this activity to continue and
possibly veer away from FDIC-assisted deals,” Desjardins
Securities analyst Michael Goldberg said in a note to clients.

By buying assets of failing U.S. lenders from the Federal
Deposit Insurance Corp (FDIC), banks can make relatively
risk-free deals, typically negotiating a loss-sharing agreement
that limits the risk of taking on an unfamiliar loan book.

A strong capital position has put the banks in the drivers’
seat for growth. And while acquisitions may not boost earnings
immediately, the banks’ ability to grab market share in
wholesale banking during the crisis is one reason profit growth
has held up so well.

Aiken said that while trading and markets revenue had been
expected to fall off sharply after a few outsized quarters,
most now expect a more tempered decline, even as battered
global competitors return to claim a share of activity.

“All else being equal, the Canadian banks have bigger
trading operations than they had two years ago,” Aiken said.

Fehr urges a conservative approach.

“My advice to investors is to remain cautious, be selective
with these banks and expect near-term volatility because
results aren’t going to continue to be stellar quarter over
quarter,” he said.

Growth Stocks

(Reporting by Andrea Hopkins; editing by Janet Guttsman and
Jeffrey Hodgson)

BAY STREET-Canada bank profits seen higher again in Q2