Capital markets expected to weigh on bank earnings

But the turmoil on the markets will pull the banks down from the third quarter ended in July — before the stock s turmoil caused by the European debt crisis.

“The fourth quarter is expected to be another very difficult quarter for wholesale banking earnings,” Scotia Capital analyst Kevin Choquette wrote in a report to clients.

Shares in Canadian financial stocks have been under pressure in recent months after recovering strongly from the recession in 2008 and 2009.

Earnings estimates for the big Canadian banks have tumbled amid worries the problems with European government debt could spread and the sluggish economic recovery in the United States.

“The escalation of the sovereign debt crisis in Europe continues to heighten systemic risk, strain capital markets and negatively impact economic growth globally, with Canada not immune, resulting in the softening outlook,”said Choquette, who noted the results for the Canadian banks will be very much dependent on their retail banking results.

Canadian Banks begin reporting their fourth-quarter earnings with CIBC (TSX:CM) and Toronto-Dominion (TSX:TD) on Thursday, followed by Scotiabank (TSX:BNS) and Royal Bank (TSX:RY) on Friday. Bank of Montreal (TSX:BMO) is expected on Dec. 6, while National Bank (TSX:NA) will be the last of the big banks to report on Dec. 8.

Revenue from trading stocks and bonds is expected to be lower as well as money earned from underwriting new investments and fees from advising companies on mergers and acquisitions.

The results follow similar trends at the European and U.S. investment banks which recently reported their quarterly earnings.

UBS AG announced plans earlier this month to cut some 2,000 jobs in its investment bank unit over the next several years.

In Canada, investment firm Canaccord Financial Inc. (TSX:CF) and broker and investment dealer GMP Capital Inc. both recently reported quarterly losses. They also saw revenues fall 25% and by more than half, respectively.

CIBC analyst Robert Sedran said he expects earnings on average to be down about 8.2% compared with the third quarter, but up 5.5% relative to the fourth quarter last year.

“It seems pretty clear at this stage if the banks are able to exceed estimates — especially in a quarter that is often viewed as a clean-up quarter for the sector — it will be because estimates for the quarter have been taken down too far, not because of underlying strength,” Sedran wrote.

“Our estimates have indeed come down, though whether they have come down too far or not enough remains to be seen.”

According to Thomson Reuters, analysts on average expect CIBC to earn $1.81 per share, while TD Bank is expected to earn $1.53 per share.

Scotiabank is forecast to earn $1.08 per share, while Royal Bank is expected to earn 98 cents per share. Bank of Montreal is expected to earn $1.31 and National Bank a $1.65.

RBC Capital Markets analyst Andre-Philippe Hardy said the outlook for 2012 will be important.

“In light of the recent market volatility and slowing economic growth, we expect bank commentary on the outlook for 2012 to have a greater impact on share prices than reported earnings relative to expectations,” Hardy wrote in a note.

“Our hunch is that earnings growth targets are unlikely to be changed since most bank economists are calling for muted economic growth in 2012 — not a recession.”