Banks expected to report healthy earnings

Robust loan volumes driving higher profits

TORONTO Mortgage lending is once again in the spotlight as Canada’s banks head into third-quarter earnings season, with analysts calling for robust loan volumes, driving higher profits across most of the sector.

The much-hyped story anticipating deteriorating conditions in the housing market leading to dramatic price declines and losses at the banks has not materialized, at least not yet.

Analysts are calling for a modest slowdown in mortgage revenue growth, slipping to around five per cent from near double-digit levels in 2011.

Another much-watched theme is the banks’ insurance business, especially following recent floods in Alberta as a result of which TorontoDominion Bank pre-released charges it expects to take relating to its exposure to losses there.

Often a wild card, the banks’ capital markets operations are expected to deliver mostly lacklustre results due to a slow summer, even softer this year than in the past.

“Overall, we anticipate solid revenue advances averaging just under eight per cent compared to prior year levels,” said Stonecap Securities’ Brad Smith in a recent note to clients. Smith is calling for earnings growth across the sector of about six per cent compared to the average of analysts’ consensus of about three per cent.

Most of the earnings gains will come from solid trading revenues along with merger and acquisition fees, he said.

Lenders have been enjoying steady profits from mortgage lending thanks to a bull housing market going back more than a decade in most major cities.

While retail lending is far from their only earnings driver, it is consistently the biggest.

It also provided protection in the financial crisis and the recession that followed.