By Nicole Mordant
VANCOUVER, British Columbia (Reuters) - Despite taking some of the sting out of their fourth-quarter results by announcing C$1.9 billion in charges already, Canada's big banks face a grilling in coming weeks on what further losses might stem from the default-hit U.S. subprime mortgage market.
Bank of Montreal
"We believe that management commentary on the outlook for 2008 will be more important for bank share prices than actual earnings levels," said RBC Capital Markets analyst Andre-Phillipe Hardy in a research note to clients.
Most analysts have continued to forecast earnings numbers without the already-announced charges, much of which have been offset by one-off gains from their stakes in credit card firm Visa, which is expected to go public early next year.
One exception is Desjardins Securities analyst Michael Goldberg, who expects the group's fourth-quarter operating profit, which excludes unpredictable items like loan loss provisions and investment gains and losses, to fall 6 percent.
The drop comes largely on the back of writedowns for investments in sophisticated subprime-related securities such as collateralized debt obligations, residential mortgage-backed securities and asset-backed commercial paper.
The credit crisis, sparked when high-risk U.S. home owners were squeezed by falling property prices and rising interest rates, has cost banks around the world more than $50 billion and forced the exit of some high-profile banking bosses.
By comparison, Canadian banks' exposure to the U.S. subprime real estate market is small.
But investors remain worried about more subprime-related
losses evident in the 16 percent plunge in Canadian Imperial
Bank of Commerce's
CIBC, which has the highest stake of Canada's banks in subprime securities, has announced writedowns for almost half its C$1.7 billion ($1.73 million) of net unhedged exposure.
"In particular, investors do not know how big the gross exposure is, but appear to be speculating that it is much greater than the net exposure," Desjardins Goldberg wrote.
Overall, shares in big banks are down 13 percent this year, far below the S&P/TSX composite index's 3 percent gain.
Fourth-quarter results are also expected to show weaker non-interest income as a global tightening of credit markets raised funding costs in wholesale markets.
More expensive credit has also meant a slowdown in financing activities for capital markets divisions, which have further been hit by a dearth of private equity merger and acquisition deals.
A stronger Canadian dollar will also hit banks with
operations outside Canada, in particular Bank of Nova Scotia
"The fourth quarter is the beginning of some tough quarters for the banks," said Blackmont Capital analyst Brad Smith.
On the bright side, earnings are expected to again be bolstered by domestic retail and wealth management operations, which make up about two-thirds of the group's earnings.
These continued to do well because of high employment, low interest rates and a strong domestic housing market.
Overall, analysts expect core cash earnings -- which exclude the pre-announced charges and gains -- of 9 percent in the fourth quarter, according to Reuters Estimates.
Toronto-Dominion Bank
Most analysts expect Scotiabank to be the only bank to
raise its dividend. National Bank of Canada
($1=$0.98 Canadian)
(Editing by Rob Wilson)
© Reuters Limited. All Rights Reserved.
Reproduction or redistribution of Reuters content, including framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.
