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PREVIEW-Canadian banks set to report slowest earnings growth since crisis on 'confluence of headwinds'

By Nichola Saminather
    TORONTO, Nov 24 (Reuters) - Canadian banks this week are
gearing up to report their slowest annual earnings growth since
the global financial crisis, as analysts and investors brace for
another challenging profit season due to tougher economic
conditions.
    Profit margins are being squeezed by factors such as falling
revenues from capital market units and higher bad-loan
provisions. Analysts expect earnings per share (EPS) to grow at
just 3% to 4% for fiscal 2019, according to a straw poll by
Reuters. That would be the slowest growth rate since the fiscal
2009. 
    "Banks are facing a perfect storm with a confluence of
headwinds," said Brian Madden, portfolio manager at Goodreid
Investment Counsel in Toronto, adding that lenders' long-run
aspirational EPS growth targets are nearly double their current
levels.
    Loan books and margins should be under pressure in the near
term, analysts said, as oil pipeline congestion weighs on the
energy-reliant economy, record household debt curbs mortgage
growth and global economic uncertainty keeps interest rates low.
    That has weighed on bank stocks, with the Canadian banks
index  .GSPTXBA  rising just 9.4% over the past year, less than
the 13% gain in the broader Toronto stock benchmark  .GSPTSE .
    "There is downside risk to (banks') share prices, given a
challenging operating environment," Credit Suisse analyst Mike
Rizvanovic wrote in a note, adding that fiscal 2020 average EPS
estimates have declined by more than 4% since Jan. 1, 2019.
   Bank of Nova Scotia  BNS.TO  kicks off earnings reporting on
Tuesday, with Canada's remaining five major banks following next
week.
    Credit Suisse expects a 26% rise in fourth-quarter loan-loss
provisions for the sector from a year ago, driven by consumer
insolvencies, which jumped 19% in September, the largest
increase since at least 2011. 
    Challenges also linger for banks' beleaguered capital
markets businesses, the only segment to deliver negative
earnings growth with a 12% decline so far this year, according
to National Bank of Canada.
    Banks' investments to expand their capital markets'
businesses, particularly in the U.S., have not yet generated
revenues, Gabriel Dechaine, an analyst at National Bank of
Canada, wrote in a note.
    "However, the cost of these strategies has definitely had an
impact," he added.
    Barry Schwartz, chief investment officer at Baskin Asset
Management, who expects earnings growth of between 4% and 6% in
fiscal 2020, believes some of the concerns are overblown. 
    "Capital markets are extremely cyclical," he said. "But no
one's defaulting on their (loans), net interest margins have
remained stubbornly higher than anybody would have expected...
banks have yet to get full credit for that."
    Goodreid's Madden expects EPS growth of 4-6% in 2020, with
share buybacks bolstering that rate, while net income grows more
slowly.
    "But it is a testament to the banks' capital strength that
they can use share buybacks to bolster EPS growth during...
slower organic growth," he said.

 (Reporting By Nichola Saminather
Editing by Denny Thomas and David Gregorio)
 ((Nichola.Saminather@thomsonreuters.com; +1-416-687-7604;))
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