Source: The Canadian Press

Sunny Freeman

The big news on the Toronto stock market in the days ahead will be a slew of fourth-quarter earnings reports from Canada’s biggest banks, which are expected to paint a healthier picture of Canada’s financial institutions.

Royal Bank of Canada (TSX:RY), Bank of Montreal (TSX:BMO) TD Canada Trust (TSX:TD), CIBC (TSX:CM) and Scotiabank (TSX:BNS) and National Bank of Canada (TSX:NA) are scheduled to report their fourth quarter earnings over the next two weeks.

Analysts’ project combined big bank earnings to increase by as much as 9% year-over-year and about 5%from the third quarter.

The banks’ capital markets divisions — which were a big drag on bank earnings in the prior quarter — are expected to show an improvement in the three months ended Oct. 31.

But the banks’ strong domestic foothold in consumer banking provides the foundation for robust earnings growth, said Jonathan Popper, assistant vice-president and senior portfolio manager at MFC Global Investment Management.

“Canada’s been in the sweet spot, our real-estate market has been strong, interest rates are low,” he said.

“The mortgage numbers are going to look good for all the banks and the loan loss provisions, with consumer confidence going up, not only will that not be a disappointment, but it could be a positive surprise,” Popper said.

However, TD Bank and Royal Bank of Canada could see less significant growth than their peers, dragged by operations in the United States where the consumer credit and mortgage markets are still in the doldrums.

Investors will be looking for signs that some of the big six banks will start raising dividends again after taking a pause during the recession.

National Bank, followed by TD Bank, appear most likely to raise dividends, as they sit at the low end of their dividend payout ratios, Popper said.

“(Raising dividends) this quarter would certainly be a pleasant surprise, but I’m expecting 2011 to really be their targeted date,” Popper said.

“A solid quarter this time around will only just reinforce that a January-February (dividend) announcement will come” Popper said.

If bank performance matches what analysts have been calling for, overall earnings for Canadian companies reporting on the TSX would be up by 12% year-over-year, CIBC economist Peter Buchanan wrote in a report.

The TSX is up about 9.8% year to date and an even more impressive 14% since the lows that were hit during July. But as markets go into the home stretch for the trading year, volatility has been picking up.

Last week, positive economic news from the U.S. and Canada wasn’t enough to overshadow global uncertainty driven by fears of the spread of sovereign debt to more euro nations and mounting military tensions on the Korean peninsula.

Soft commodity prices will also have a negative effect on the TSX in next few weeks as news of European debt continues to dominate the headlines and traders take some profits after a run up in prices in the past few months, said Aaron Fennell, a senior market strategist at Lind-Waldock Canada.

“The sovereign debt crisis is probably the most serious economic issue that were going to see come to the forefront after Christmas,” he said.

“In the next few weeks traders are going to get really concerned about Europe and there will be a huge risk trade going on,” he said.

Fear over sovereign debt will causes commodity prices to drop initially, but as the European Union bail outs happen, concerns turn toward inflation and that turns around commodities prices, which begin to rise again, Fennell explained.

Elsewhere on the market, cyclical sectors, such as materials, energy, consumer discretionary and transport, continue to outperform the broader market, despite sovereign debt concerns and policy tightening in China– but if hostility between the Koreas continues to increase that trend will be put on hold, said Bank of Montreal economist Robert Kavcic.

“Those tensions aside, the fact that (those sectors) are all still outperforming hints that the market sees continued growth ahead in the U.S., however modest,” he said.

Economic reports expected next week include the Canadian gross domestic product report, in addition to productivity data and the ISM manufacturing survey from the U.S.

But the main event on the economic calendar for the week comes Friday when November employment reports are expected from both Canada and the U.S.