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Canada’s big banks to start reporting Q3

OTTAWA — Canada’s big banks are expected to report improved earnings compared with a weak quarter a year ago, but analysts say the turmoil in the global economy is creating uncertainty for the rest of the year.

OTTAWA — Canada’s big banks are expected to report improved earnings compared with a weak quarter a year ago, but analysts say the turmoil in the global economy is creating uncertainty for the rest of the year.

Shares in the banks have been beaten down in recent weeks as stocks have sold off broadly amid concern about the U.S. economic recovery and sovereign debt in Europe.

Canadian bank stocks were up 12 per cent for the year in early April, but the sector plunged 15 per cent from its highs on weak second-quarter earnings, a dim outlook for the third quarter and economic upheaval in the U.S. and Europe.

Scotia Capital analyst Kevin Choquette noted that shares in the Canadian banks will likely remain under pressure, but wrote in a report to clients that now may be a time to buy.

“The recent bank share price correction, we believe, is an opportunity to increase bank weightings based on stable fundamentals and compelling valuation,” Choquette said.

“Our share price targets remain unchanged and, in our view, are very aggressive in the context of global uncertainty and market sentiment. However we expect that as systemic risk moderates, returns will be attractive.”

The Scotiabank outlook contrasted with one from analysts at CIBC, who said that uneven economic data, an indebted consumer, rising competition, slowing earnings growth and turbulent capital markets all contributed to their view.

“As we look out over the next couple of quarters, we see no obvious sector-specific catalysts that will lift the space,” CIBC said.

“The upcoming earnings season is unlikely to be that catalyst especially with what should be a weak capital markets contribution.”

CIBC rated the sector “market weight” and named TD Bank its top pick.

Bank of Montreal (TSX:BMO) is the first of the large Canadian banks to report its third-quarter earnings with its results coming out on Tuesday, followed by National Bank (TSX:NA) on Thursday.

Royal Bank (TSX:RY) reports earnings on Friday and Scotiabank (TSX:BNS) reports on Aug. 30. CIBC (TSX:CM) is scheduled for Aug. 31, while TD Bank (TSX:TD) reports on Sept. 1.

One-time adjustments expected by the banks in the third quarter include a hit to Royal Bank due to the sale its U.S. retail banking business, which it has sold to PNC Financial Services Group Inc.

Royal Bank said its results for the quarter will include an after-tax loss of about $1.6 billion including an estimated write off of goodwill and intangibles of $1.3 billion after-tax.

Results at the Bank of Montreal are also expected to be muddied by its acquisition of Milwaukee-based Marshall and Ilsley Corp. BMO paid US$4.1 billion for the Midwestern bank in a move that doubled its U.S. operations.

Generally, provisions for bad loans held by the banks are expected to decline compared with a year ago, but they may be nearing a trough and could head higher compared with the second quarter.

“In our view, loan loss rates are unlikely to trough at or below where they did in either of the last two credit cycles for two reasons,” CIBC said.

“One, the power of the current recovery is unlikely to match those in previous cycles. Second, a big part of the net declines in provisions for credit losses realized in those previous periods was due to recoveries in business loans, which are unlike to repeat this time around.”

Trading revenue is also expected to be under pressure at the big banks for the quarter based on sharply lower trading revenue reported at the U.S. investment banks.