Despite taking some of the sting out of their fourth-quarter results by announcing C$1.9 billion in charges already, Canada's big banks face a grilling in coming weeks on what further losses might stem from the default-hit U.S. subprime mortgage market.
Bank of Montreal is the first of Canada's big six banks to release quarter and full-year results next Tuesday.
"We believe that management commentary on the outlook for 2008 will be more important for bank share prices than actual earnings levels," said RBC Capital Markets analyst Andre-Phillipe Hardy in a research note to clients.
Most analysts have continued to forecast earnings numbers without the already-announced charges, much of which have been offset by one-off gains from their stakes in credit card firm Visa, which is expected to go public early next year.
One exception is Desjardins Securities analyst Michael Goldberg, who expects the group's fourth-quarter operating profit, which excludes unpredictable items like loan loss provisions and investment gains and losses, to fall 6 percent.
The drop comes largely on the back of writedowns for investments in sophisticated subprime-related securities such as collateralized debt obligations, residential mortgage-backed securities and asset-backed commercial paper.
The credit crisis, sparked when high-risk U.S. home owners were squeezed by falling property prices and rising interest rates, has cost banks around the world more than $50 billion and forced the exit of some high-profile banking bosses.
By comparison, Canadian banks' exposure to the U.S. subprime real estate market is small.
But investors remain worried about more subprime-related losses evident in the 16 percent plunge in Canadian Imperial Bank of Commerce's stock this month.
CIBC, which has the highest stake of Canada's banks in subprime securities, has announced writedowns for almost half its C$1.7 billion ($1.73 million) of net unhedged exposure.
"In particular, investors do not know how big the gross exposure is, but appear to be speculating that it is much greater than the net exposure," Desjardins Goldberg wrote.
Overall, shares in big banks are down 13 percent this year, far below the S& P/TSX composite index's 3 percent gain.
Fourth-quarter results are also expected to show weaker non-interest income as a global tightening of credit markets raised funding costs in wholesale markets.
More expensive credit has also meant a slowdown in financing activities for capital markets divisions, which have further been hit by a dearth of private equity merger and acquisition deals.
A stronger Canadian dollar will also hit banks with operations outside Canada, in particular Bank of Nova Scotia, which has the largest foreign network.
"The fourth quarter is the beginning of some tough quarters for the banks," said Blackmont Capital analyst Brad Smith.
On the bright side, earnings are expected to again be bolstered by domestic retail and wealth management operations, which make up about two-thirds of the group's earnings.
These continued to do well because of high employment, low interest rates and a strong domestic housing market.
Overall, analysts expect core cash earnings -- which exclude the pre-announced charges and gains -- of 9 percent in the fourth quarter, according to Reuters Estimates.
Toronto-Dominion Bank, the third-largest bank, is expected to show the highest EPS growth of 35 percent because of "industry-leading retail growth (and) a lower relative exposure to wholesale markets", RBC's Hardy said.