23 November 2006

Strong Quarter Predicted for Banks

Reuters, Nicole Mordant, 23 November 2006

Analysts expect Canada's big six banks to show handsome earnings growth of around 10 per cent for their fourth quarters, and forecast that four of the banks will bump up their dividends as the sector benefits from an unusually long period of health.

Reporting season for the August-to-October period kicks off Tuesday with Bank of Montreal's results.

"We're looking for high single-digit earnings or low double-digit," said John Kinsey, portfolio manager at Caldwell Securities in Toronto.

"It's going to be more of the same. The banks are still doing well. The focus has been for the past five years on dividend increases and on share buybacks," he said.

Canadian banks, stuffed with cash and with few places to park it lately, have been returning some of that cash to shareholders. Several have announced share repurchase programs, and in the last quarter Royal Bank of Canada and Toronto-Dominion Bank boosted their dividends.

Analysts now expect their four big peers — Bank of Montreal, Bank of Nova Scotia , Canadian Imperial Bank of Commerce and National Bank of Canada — to announce higher quarterly dividends.

Scotiabank and National Bank could also increase their target ranges for dividend payouts, said Mario Mendonca, an analyst at Genuity Capital Markets in Toronto.

That should hearten income-hungry investors who flocked into the banking sector this month in the wake of Ottawa's Halloween announcement that it will start taxing income trusts, which pay out nearly all of their profits to unitholders.

"With the income trust tax changes, people are looking at large blue chips as a source of income and therefore there is going to be a real desire for those target payout ratios to move up," said Ohad Lederer, an analyst with Veritas Investment Research in Toronto.

Although profits are expected to be strong — return on equity for the sector is seen at between 18 and 24 per cent — analysts fret that the best times may be over.

They note, for example, that banks will need to set aside more money in future to cover bad loans.

"Provisioning levels need to move higher as the credit environment has the potential to deteriorate," RBC Capital Markets analyst James Keating said in a research note. "It may not be evident in Q4 results, but we are watching for higher loan losses in 2007 and 2008."

On top of a solid performance from their personal and commercial banking operations, the banks' wealth management operations should show "modestly higher" fourth-quarter earnings from increased trading volumes on the Toronto Stock Exchange, said Susan Cohen of Dundee Securities.

Investors will also look for bank executives to outline their business expectations and goals for the new fiscal year.

Here are the mean analyst estimates for earnings per share, before unusual items, as compiled by Reuters Estimates:

• Bank of Montreal: $1.25
• Royal Bank: 90 cents
• National Bank: $1.25
• CIBC: $1.65
• TD Bank: $1.19
• Scotiabank: 88 cents