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Cost-containment a buzzword for Canadian banks' outlook

RBC will report its quarterly earnings on Friday, Dec. 2, 2011.


Not a lot of good things are being said about the fourth quarter for Canadian banks. The fiscal crisis in Europe is hitting capital markets earnings hard, while low interest rates are eating into already-thin lending margins.

The sector isn't in the tough spot it was in three years ago – during the worst of the credit crisis – but the growth outlook for banks heading into 2012 is not a rosy one.

"The mantra that we have espoused toward the Canadian banks in recent months – It's not 2008, but it's not great – in our view continues to be an appropriate depiction of where the sector stands," Sumit Malhotra, an analyst with Macquarie Capital Markets Canada Ltd., said in a research note previewing fourth-quarter earnings this week.

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Cost containment is now the buzzword across the sector as banks look to take the sting out of sluggish revenues by keeping a close eye on how much they are spending. Here is a look at the banks that report earnings this week:

Thursday: Toronto-Dominion Bank

For much of the year, banks have been reporting shrinking interest margins (the difference between the rate they pay on deposits and what they collect on loans) and it will be no different in the fourth quarter. That has eaten into the sector's earnings.

Analysts will be watching to see if TD has been able to fight that trend, given its record of better-than-average loan growth in recent quarters. The bank has reported average loan growth of 8 per cent since the start of fiscal 2010, compared with 6 per cent for the industry.

"We expect faster year-over-year earnings growth at TD," said RBC Dominion Securities analyst Andre-Philippe Hardy in a research note to clients. However, the bank's exposure to the U.S. market will also be scrutinized. TD has about 1,300 branches south of the border, more than it has in Canada. The woes of the U.S. economy can be a drag on its operations.

Thursday: CIBC

When revenues are lean, costs must be trimmed. Canadian Imperial Bank of Commerce has been cutting costs over the past year and analysts expect it to perform ahead of the pack in that department this quarter.

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"Amid the challenging revenue environment, cost containment will likely be a dominant theme for the quarter," said Barclays Capital analyst John Aiken in a research note.

Mr. Aiken believes CIBC, along with TD, has performed best in recent months at controlling costs. CIBC's expenses are expected to rise roughly 3 per cent in the quarter, a smaller number than its peers. That will be important, since sluggish earnings growth is forecast across the sector for 2012.

"We see little reason to believe that the banks that have done the best job in managing domestic retail expenses will not continue to do so." Mr. Aiken said.

Friday: Royal Bank of Canada

These are not good times for the capital markets businesses of Canadian banks. Jitters about the sovereign debt crisis in Europe have ravaged global stock markets.

The TSX/S&P Index was down 5 per cent in the fourth quarter, compared with the same period a year ago. Not surprisingly, trading revenues have fallen sharply. But how bad is it?

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Analysts are now struggling to forecast earnings for banks such as Royal Bank of Canada, which have large capital markets divisions and are particularly sensitive to the trading slowdown.

"Trading in particular will be a wild card this quarter." CIBC World Markets analyst Rob Sedran said in a research note. "If the banks are able to exceed estimates … it will be because estimates for the quarter have been taken down too far, not because of underlying strength."

Friday: Bank of Nova Scotia

Scotiabank pulled the trigger on two major international deals during the quarter, and much of the attention will focus on how its global operations are faring.

The bank bought slightly less than 20 per cent of China's Bank of Guangzhou for $719-million, then purchased a 51-per-cent share in Colombia's Banco Colpatria for about $1-billion. Such deals have helped Scotiabank boost lending, even when loan growth is sluggish at home.

Just as cost controls are a focus in Canada this quarter, they're also a concern for Scotiabank's international operations. The bank's Mexican division recently said expenses were up 8 per cent last quarter, which makes analysts uneasy.

If the trend holds true in other markets, Scotiabank could be left with a big job of cost trimming. "Though Mexico is only one region within international [banking] we think it is reasonable to expect that any significant push to rein in spending will likely be a 2012 initiative," Mr. Malhotra said.

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Senior Writer

Grant Robertson is an award-winning journalist who has been recognized for investigative journalism, sports writing and business reporting. More

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