The Canadian Press

Canadian banks, which will begin reporting their earnings on Thursday, are expected to suffer this quarter from declines in trading revenue, offset somewhat by lower loan losses.

Trading revenues spiked in 2009 as investors scrambled to keep up with extraordinarily volatile markets. Analysts were predicting a return to more “normalized” trading levels in 2010, but U.S. banks’ experience in their fourth quarter indicates the decline may be more severe than predicted.

With Bank of America (NYSE:BAC), Citigroup (NYSE:C) and J.P. Morgan Chase (NYSE:JPM) experiencing declines of more than 50% in total fourth-quarter trading, the Canadian banks could face a similar headwind in their fiscal first quarter, according to analysts with Barclays Capital.

“As evidenced by the U.S. banks, trading revenues are likely to generate significant sequential declines, generating substantial headwinds to revenue and earnings growth,” commented Barclays analyst John Aiken.

Credit Suisse forecast aggregate net trading revenue of $2.3 billion for the Canadian banks in their November to January quarter, down approximately 34% from its high in the third quarter of fiscal 2009.

“With regards to the current level of ‘exceptional’ trading revenue, managements have been fairly candid suggesting that the sweet spot is closing and that the cyclical theme may end in (the first half of 2010),” commented Credit Suisse analyst James Bantis.

However, the pressure on revenue and earnings from lower trading revenue should be moderated somewhat by lower loan-loss provisions. Loan-loss provisions are an expense set aside by banks as an allowance for bad loans, such as when consumers default on their mortgages.

These were quite high during the recession, as both consumers and businesses were defaulting on their loans in higher-than-usual numbers. However, the impact on Canada’s banks was minimal compared to that in the U.S., where the recession combined with the sub-prime mortgage crisis had a devastating impact on many lending institutions.

Credit Suisse forecast aggregate loan-loss provisions of $2.5 billion for the quarter, which is approximately 9% lower than the run rate of the last four quarters.

Barclays’ Aiken added that this would be the first sequential decline in provisions in “recent memory.”

“With a stabilizing credit environment in the U.S. and signs of improvements on the domestic consumer front, it is quite possible that the Canadian banks will report another quarter of declining provisions,” Aiken said. “That said, we remain cautious on our outlook for business lending and are not convinced that provisions have peaked.”

Aiken predicted that provisions will peak in the second half of 2010 and will decline in 2011, eventually becoming a “tailwind” for earnings.

The possibility of new global banking standards that would include more stringent capital requirements could result in the Canadian banks accumulating capital to protect themselves, even though they’re some of the best capitalized banks in the world. This means “acquisitions, share buybacks and dividend increases are not likely until the latter half of 2010 at the earliest,” Aiken said.

Bantis agreed, predicting there will be no dividend increases in the “near term.”

He added that retail banking should be one of the banks’ stronger areas in the first quarter due to growth in residential mortgages and other personal lending.

Forecasts compiled by Thomson Reuters predict CIBC (TSX:CM), which will report Thursday, will see earnings per share of $1.41, down 16% from a year earlier.

Bank of Montreal (TSX:BMO), reporting March 2, is expected to report EPS of $1.03, down six per cent.

Meanwhile, analysts expect Royal Bank of Canada (TSX:RY), which will report March 3, to see its EPS decline 12% to $1.04 and Bank of Nova Scotia (TSX:BNS), reporting March 9, to report earnings of 88 cents per share, down 3%.

Toronto-Dominion Bank (TSX:TD), reporting March 4, is the only bank expected to see a slight increase in earnings per share, up 1% to $1.35.