Canada's big banks are likely to report lower first-quarter earnings over the next two weeks as their lucrative trading income plunges, analysts say.

Trading income spiked last year as the banks benefited from a wider interest-rate spread during the credit crisis. And with so many foreign competitors unable or unwilling to trade during the crisis, trading business flocked to the Canadian banks. That's no longer quite the case. 

Bank analysts say recent financial results from some big U.S. banks show just how much trading revenue has been hit in the aftermath of the global meltdown.

                                                                  Expected Q1/2010 bank earnings per share (EPS) 
 Bank  Date  EPS  Change from Q1/2009
 CIBC  Feb. 25  $1.41  -16%
 Bank of Montreal   March 2  $1.03  -6%
 Royal Bank  March 3  $1.04  -2%
 TD Bank  March 4  $1.35  +1%
  Bank of Nova Scotia  March 9  $0.88  -3%
  Source: Thomson Reuters 

"As evidenced by the U.S. banks, trading revenues are likely to generate significant sequential declines, generating substantial headwinds to revenue and earnings growth," said Barclays Capital analyst John Aiken.

An analyst at Credit Suisse forecasts total bank trading revenue of $2.3 billion in Q1, which ended Jan. 31. That would represent a 34 per cent drop from its peak two quarters earlier. 

Some analysts think that revenue drop will be partially offset by lower loan loss provisions — a process where banks lower the amount of money they put aside to cover loans gone bad.  

"With a stabilizing credit environment in the U.S. and signs of improvements on the domestic consumer front, it is quite possible that the Canadian banks will report another quarter of declining provisions," Aiken said.

But some bank watchers worry that that credit losses may yet rise. The Vanier Institute reported last week that Canadians' debt-to-income ratio hit an all-time high of 145 per cent in 2009. The number of mortgages and credit card accounts that were at least 90 days overdue were up by 50 per cent and 40 per cent, respectively, from its 2008 survey.

No dividend hikes

Analysts don't expect the banks to hike their dividends during this reporting period.

Statistics Canada reported Wednesday that profits at financial firms, which include insurance companies, fell two per cent year-over-year in the fourth quarter of 2009.

Bank earnings season kicks off Thursday, with reports from CIBC and National Bank.

At CIBC's annual meeting in Montreal, shareholders will be among the first to exercise their right to vote on compensation policies for bank executives. All of the big Canadian banks now allow shareholders to vote on a non-binding "say on pay" resolution on executive compensation. 

The World Economic Forum has declared Canada's banking system the soundest in the world for the last two years in a row. None of Canada's banks required a bailout during the meltdown, even as Canada slipped into recession.    

With files from The Canadian Press