Rising loan losses — especially on commercial real estate ventures — will be the focus of concern when Canada's biggest banks report their fiscal third-quarter earnings this week.

As usual, Bank of Montreal is to kick off the earnings season, releasing its results on Tuesday. Canadian Imperial Bank of Commerce follows on Wednesday, and Toronto-Dominion Bank, Royal Bank of Canada and National Bank of Canada take turns Thursday. Bank of Nova Scotia finishes Friday.

Several of these companies have U.S. subsidiaries. Bank of Montreal is the parent of Harris Bankcorp in Chicago; Toronto-Dominion is the parent of TD Bank in Cherry Hill, N.J., and Portland, Maine, and Royal Bank of Canada is the parent of RBC Bank in Raleigh.

"In the first half of 2009, trading revenues were so strong that they really masked the deteriorating credit picture," according to Juliette John, a portfolio manager at Bissett Asset Management in Calgary. But now that capital markets are less volatile, "we may start to see the impact of the weak economy."

A record level of consumer bankruptcies, sagging retail sales, a slow real estate market and growing unemployment will probably be reflected in higher loan-loss provisions at all the banks, analysts say.

Some estimate that provisions will rise more than 80% from the year earlier.

Though higher provisions have marked quarterly results so far this year, their impact has been muted by trading results as the Canadian banking companies benefited from volatility in the equity, foreign exchange and interest rate markets.

However, now that equity markets have become relatively stable, that offset may no longer exist. On the other hand, analysts said, the improvement in market conditions has probably also boosted wealth management revenues and underwriting fees.

Still, analysts say they expect the banks to report their seventh consecutive decline in earnings this quarter. Most see earnings falling 11% to 16% from the year earlier, mainly due to weakening credit.

Some observers were relatively bullish. David Baskin, a principal of Baskin Financial, said he believes underwriting income at the banking companies "is going to be bigger than people expect," given the plethora of preferred share and corporate bond issues in the past quarter.

Though he expects "pretty grisly" loan losses in commercial real estate — especially among those banks with U.S. operations — he believes the banks will be more flexible about whether they book losses or raise reserves on their overall loan books.

However, even an upside surprise is unlikely to move bank stock prices much higher. Canadian bank shares have risen about 80% on average since their March lows as investors gained confidence about the banks' ability to navigate the economic downturn.

"Most of the sentiment shift has now occurred," BMO Capital Markets said in a note.

There could still be a handful of writeoffs on structured credit holdings, but the strong capital ratios at the banks have alleviated any investor concerns. Rather, attention will be paid to dividend policy, especially after the insurer Manulife Financial Corp. took the unusual step of cutting its dividend by 50% last month.

Few see the banks reducing their payouts, and with many of the bank dividends well above the payout target range, few see any hikes ahead. But discussion over the outlook is likely.

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