By Jeffrey Hodgson
TORONTO (Reuters) - It's a problem most of the world's bankers would love to have in 2009.
Canadian banks are expected to post weaker quarterly results when they kick off their reporting season on February 25.
Yet unlike many U.S. and European lenders -- ravaged by the global financial crisis, forced to beg for government aid and dogged by rumors of nationalization -- Canada's banks are actually expected to turn a profit.
The country's banking system was ranked last year as the world's soundest by the World Economic Forum. Analysts said the Canadian industry's conservative lending practices, which helped it avoid the writedowns and losses seen at firms like Bank of America Corp (BAC) and UBS AG UBSN.VX, should ensure a profitable first quarter.
But they also warn investors shouldn't be complacent, predicting profitability may well deteriorate during the remainder of 2009 as Canada sinks further into recession.
"From the perspective of somebody who resides in Europe or somewhere where the banking system is progressively more strained, it might almost seem a bit alien to look at the Canadian system," said Craig Fehr, financial services equity analyst at Edward Jones.
"My expectation is that we are going to see earnings in the first quarter and for 2009 ... but I think that there are a lot of headwinds."
Canada's Big Six lenders -- Toronto-Dominion Bank TD.TO, Royal Bank of Canada RY.TO, Canadian Imperial Bank of Commerce CM.TO, National Bank of Canada NA.TO, Bank of Montreal BMO.TO and Bank of Nova Scotia BNS.TO -- report results between February 25 and March 3.
Many analysts, while still forecasting profits, have recently scaled back their expectations as weaker-than-expected economic data and sinking financial markets cloud the outlook.
Blackmont Capital this month cut its earnings forecasts for Canada's financial sector for the fourth time since August, predicting a 13 percent decline from a year earlier in the first-quarter earnings per share of the Big Six banks.
Blackmont financial analyst Brad Smith warned that given deteriorating credit quality, management will likely want to stay "in front of the curve" by taking provisions.
"We shouldn't become complacent about the relative strength and the durability of the strength of Canadian banks because our economic scenario is delayed in many respects," he said.
"Earnings are coming down by increments as opposed to in large chunks, which is typically what's happened in the U.S. ... It means that there's as much likelihood of further downgrades to earnings outlooks as there is to stabilization."
DIVIDENDS SECURE NEAR TERM
Dundee Capital Markets has also forecast just a 13 percent year-over-year decline in quarterly earnings per share for the Big Six banks.
Analyst John Aiken the said first quarter will be reasonably strong with stable net interest margins and solid capital markets revenues due to the banks themselves raising money on the markets. But he said the situation won't last.
"This quarter's earnings will likely be a relative high water market for 2009," he said.
"We're likely to see lending volumes decrease as the banks try to manage their capital rations ... credit will continue to deteriorate, so you're going to get very significant headwinds from provisions for credit losses."
Analysts said given the difficult outlook, Canadian bank shares are generally fairly priced even though valuations are low by historical standards.
They noted that bank dividends, which typically yield 7 percent or more, are likely secure for the near term even if they're unlikely to rise in 2009.
But they warned that even given conservative business models and lower leverage, those dividends and the bank's profits themselves could eventually be at risk if the global financial crisis worsens.
"Make no mistake, the Canadian banks are not immune to what's going on around the world and the challenges that exist globally," Fehr said.
Reporting date Bank Reuters Estimate EPS (Pre Except)
Feb 25 TD C$1.28
Feb 26 CIBC C$1.48
Feb 26 Royal C$0.94
Feb 26 National C$1.26
March 3 BMO C$0.99
March 3 Scotia C$0.86
(Reporting by Jeffrey Hodgson; editing by Peter Galloway)