Friday, September 01, 2006

Banks' Profit Growth Seen Slowing

Reuters, Lynne Olver, 1 September 2006

Third-quarter results at most of Canada's Big Six chartered banks easily blew past market expectations, but analysts expect double-digit profit growth to cool as near-perfect conditions become less favorable.

The stream of reports for the May-July period wrapped up on Thursday with results from Canadian Imperial Bank of Commerce and National Bank of Canada .

CIBC reported a quarterly profit of C$662 million, but it was not comparable to the previous year due to a big C$2.5 billion Enron-related charge taken in 2005. National Bank reported a 6 percent rise in earnings.

The best news came last week, with some banks setting records. Bank of Montreal's 30 percent profit rise topped Toronto-Dominion Bank's 20 percent jump in adjusted profits, the 20 percent increase posted by Royal Bank of Canada and the 19 percent climb at Bank of Nova Scotia .

"It was a very strong earnings season, there's no doubt about it," said Tom Kersting, a bank analyst with Edward Jones.

A robust Canadian economy has kept consumers borrowing and spending, while capital markets were generally a strong point again, Kersting said.

"But these results will be difficult to repeat for the banks," he added.

Retail businesses will suffer if the economy softens, and it is widely acknowledged that loan-loss provisions must rise from their current low levels, Kersting noted. He has a neutral stance on the sector.

"I would look more for stability rather than upside from here," said Julie Brough, assistant vice-president with investment management firm Morgan Meighen and Associates in Toronto.

The very strong domestic market drove third-quarter results, she said.

"Higher interest rates have opened up margins a little bit more and allowed them to be a little more profitable in that area," Brough said. But she doesn't expect to see much improvement in retail margins, nor does she see any "additional pickup" from very low loan-loss provisions.

National Bank was "probably the biggest disappointment" of the bunch, Brough said. Its stock fell 3 percent on Thursday, but had recovered some of that ground on Friday.

"National was gaining a lot of credibility as being very competitive in the Canadian marketplace, but the numbers are showing that maybe they're not competing as strongly as they've been given credit for," Brough said.

Royal Bank and Toronto-Dominion executives had positive comments about the outlook for their U.S. operations, which impressed some analysts.

With the exception of CIBC, where revenue fell from a year earlier, the banks posted revenue growth of between 4 percent and 14 percent, according to a Merrill Lynch research note.

Nobody should have been surprised by the revenue decline at CIBC, a result of the big Enron charge it took last year, said analyst Michael Goldberg of Desjardins Securities.

CIBC still does not have enough capital to support robust loan growth like the other banks, Goldberg said. But the fact that its capital has been growing means CIBC should be able to increase volumes and top-line growth, "and that was quite encouraging to me," he said in an interview.

While he sees no dark clouds on the horizon, Goldberg expects average bank earnings growth to slow to about 8 percent in fiscal 2007, about half the rate expected this year.

Two smaller banks, Laurentian Bank of Canada and Canadian Western Bank , are scheduled to release quarterly results next week.