Canadian banks face Q3 earnings declines on provisions, markets woes

(This August 18 story corrects to say banks begin reporting results on Tuesday)

By Nichola Saminather

TORONTO (Reuters) - Canadian banks are expected to post declines in profits on average in the third quarter as a murky economic outlook drives up provisions for credit losses (PCL) while market turmoil pressures capital markets and wealth management results, analysts and investors said.

The banks, which will begin reporting quarterly results next Tuesday, will benefit from increased margins from higher interest rates while loan growth remains strong despite some slowing in mortgage lending, helping offset declines elsewhere.

Canada's Big Six banks - Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal (BMO), Canadian Imperial Bank of Commerce and National Bank of Canada - are expected to report an average drop of 3.7% in adjusted earnings per share (EPS) from both the previous quarter and a year earlier.

Most of the banks have beaten profit expectations over the past several quarters, as assets under management, and deals and trading revenues soared, and PCLs remained low, offsetting pressure on margins from record-low interest rates. These are now reversing.

"Rising interest rates are a tailwind," said Brian Madden, chief investment officer at First Avenue Investment Counsel, who expects margins to go up five to six basis points across the group. "The offsetting headwind is provisions. They've been negative at many of the banks for five or six quarters, which is not normal."

Excluding provisions and taxes, Credit Suisse analysts estimate average earnings growth of 6% from a year ago and 3% from the prior quarter.

Banks may also slow the pace of share buybacks "to preserve capital for a potential downturn," Barclays analysts said.

Analysts expect the biggest EPS reductions from a year earlier at RBC and BMO, which have the largest capital markets businesses. Toronto's stock index lost 10% during the banks' fiscal third quarter.

Scotiabank and TD, with smaller exposure to markets, are expected to be the best performers.

Investors and analysts are also expecting updates on major deals by BMO and TD in the United States, in particular the latter's acquisition of First Horizon, which is expected to close by the end of November but could face regulatory challenges.

"It will be a pretty inordinate and undue amount of political interference," if it were blocked, Madden said. "Ultimately, it probably ends up closing, but maybe it drags" into 2023.

(Reporting By Nichola Saminather; Editing by Josie Kao)