Consumers to feel squeeze as banks set to unveil poor quarterly performance

By Brenda Bouw, The Canadian Press

Canadian banks are set to unveil some of the worst quarterly results in recent memory thanks to losses suffered as a result of the global financial crisis, capping an already difficult year and setting the stage for what is expected to be another rocky period ahead for the once-stable sector.

For Canadian consumers, 95 per cent of which do business with the so-called Big Six banks, the millions of dollars in losses will make it even tougher and more expensive to borrow money.

"It's going to be pretty ugly for everyone," Chris Blumas, an analyst at Morningside Inc. said of the bank earnings that will be released starting Tuesday.

The 2008 fourth-quarter and year-end results are for the periods ending Oct. 31, the last month of which is considered one of the worst in history on the markets, with a drop in value of nearly 20 per cent on the TSX alone.

At least two banks have been preparing investors for the bad news.

Bank of Nova Scotia (TSX: BNS.TO) warned last week that it will take a $595-million charge in the fourth quarter related to the financial meltdown, while TD Bank (TSX: TD.TO) said it will book a $350-million loss.

Bank of Montreal (TSX: BMO.TO) is the first bank to report on Tuesday, followed by Bank of Nova Scotia on Dec. 2, TD Bank, Canadian Imperial Bank of Commerce (TSX: CM.TO) and National Bank (TSX: NA.TO) on Dec. 4 and Royal Bank (TSX: RY.TO) on Dec. 5.

Blumas said he expects all of the banks to announce huge losses in the fourth quarter.

"Some of the banks have had certain shocks over time, but in aggregate for the whole industry to see a shock this big, it's pretty unprecedented."

The banks have been hit in all of their businesses, ranging from securities and capital markets to wealth management. Analysts say the next blow will likely be losses from bad loans, which are expected to mount as the economic crisis deepens.

"The credit deterioration and the hit on earnings that this will cause is the second shoe to drop on the Canadian banks," said Dundee Securities Corp. analyst John Aiken, adding the banks are in the midst of the "worst operating environment" in a generation.

"Globally the banks have just been hit by capital markets losses and an environment we haven't seen since the Depression, and now we are headed into a credit downturn cycle which will be bad because of the anticipated slowdown in global GDP (gross domestic product)."

He said the banks have been weakened by the financial crisis to date, and will have more trouble withstanding a prolonged global downturn. That means more bad quarters to come.

Aiken said he expects the banks will eventually need to start cutting jobs and other expenses as a result of the growing losses.

While the Bank of Canada is expected to cut interest rates further in early December to stimulate spending in the current economic downturn, the cost of credit is not expected to fall in tandem.

Banks have already tightened credit card conditions, hiked rates for missed payments and dropped the discounts once offered on mortgages.

Bruce Cran, president of the Consumers' Association of Canada, is "mystified" by the banks' reaction to the credit crisis, in particular their decisions to tighten the screws when customers are already under financial pressure.

He believes the banks are too focused on competing in global markets, when they should be dealing with business conditions at home in Canada.

"The really big losses come from their international ambitions," Cran said.

"In the end, its consumers that pay for these ambitious forays of the banks into the world markets."

Dundee's Aiken said the banks' decisions to tighten credit are "rational" considering the global economic environment.

In fact, he said banks have been too lenient in the recent past and may have made a mistake by not pricing in enough risk.

"It's the same thing you see in insurance, after a disaster premiums always go up," Aiken said.

"The pendulum may be swinging too far, but you are compensating for past mispricing that is causing current losses."