Source: The Canadian Press

The second quarter is expected to be a bright one for Canada’s big banks, which are forecast to report lower provisions for bad loans and higher lending volumes when they begin to release their financial results this week.

UBS banking analyst Peter Rozenberg predicted an average increase in earnings per share of 9% due to a 20% drop in loan-loss provisions, to $2.13 billion from $2.67 billion a year ago.

These were higher during the recession, however the impact on Canadian banks was minimal compared with the U.S., where the recession and the sub-prime mortgage crisis had a devastating impact on many lending institutions.

Lower loan-loss provisions are a sign that the economy has improved dramatically from the same period of 2009, when the global recession was still in full swing.

Barclays Capital analyst John Aiken said an improving economy is also leading to growth in lending volumes, particularly in Canada.

“While lending growth in the U.S. will likely remain a challenge, domestic consumer lending has returned in force and should offset any incremental weakness in business lending,” Aiken wrote in a note to clients.

The economic recovery in North America has been faster and stronger than originally expected, causing Aiken to raise his sector view on the Canadian banks from neutral to positive.

“The strengthening economic outlook for Canada as well as the United States has led us to revisit some material assumptions in our forecasts for the Canadian banks,” Aiken wrote.

“In particular, we now believe that the risk of incremental credit deterioration is declining and that lending volume growth should resume.”

Rozenberg also predicted a 26% increase in trading revenues year over year.

The banks still face some risks, particularly if the debt crisis in Europe worsens and causes a repeat of the credit crunch experienced at the depths of the global recession, Rozenberg said.

“The main macro concerns are an economic slowdown in China, and policy changes, and the fragility of the Eurozone, its banking system, and the implications for global growth,” he wrote.

But Aiken said Canada’s banks will continue to weather the storm better than most.

“While we continue to believe that the U.S. banks have significantly more leverage to additional progress in the economic recovery, the Canadian banks have significantly less risk to the downside, should it begin to falter,” Aiken wrote.

“We believe that this relative downside protection with participation in the upside will continue to garner significant support for the banks’ valuation through the uncertainty surrounding contagion from Greece and the Euro zone.”

Some of Canada’s biggest banks have been increasing their exposure to the U.S. market in recent weeks. Last week, TD Bank Financial Group Inc. (TSX:TD) acquired South Financial Group’s assets in the U.S. southeast for US$191.6 million, following on the heels of another acquisition of three insolvent Florida banks.

BMO Financial Group (TSX:BMO) also recently added to its U.S. holdings in the Midwest, acquiring Rockford, Ill.-based Amcore Bank N.A. in a deal with the U.S. Federal Deposit Insurance Corp.

And Scotiabank (TSX:BNS) has agreed to buy all the assets and deposits of R-G Premier Bank in Puerto Rico.

Forecasts compiled by Thomson Reuters predict Bank of Montreal, which will report its results on Wednesday, will see earnings per share of $1.10, up from 93 cents a year earlier.

CIBC (TSX:CM), TD Bank and Royal Bank of Canada (TSX:RY) will all report on Thursday. Analysts expect CIBC to report EPS of $1.50 compared to $1.44 a year ago, TD is forecast to earn $1.38 per share compared to $1.23 and Royal is expected to see EPS of $1.09 compared to 97 cents.

Scotiabank will report on June 1, and is expected to earn 92 cents per share compared to 81 cents per share a year ago.