Canada's big banks are set to let loose with a fourth straight quarter of gangbuster earnings, but analysts wonder whether some might set aside cash to guard against civil liability related to fallen energy trader Enron Corp.
Healthy capital markets, good credit quality, and interest rates that are at four-decade lows should help the banks notch a 23.6 percent year-over-year improvement in second-quarter earnings when they begin reporting this week, according to Thomson First Call.
Profit is expected to be relatively flat when compared to the first quarter.
"It doesn't get much better than this for the banks. They've had it good for a long time here," said John Kinsey, portfolio manager at Caldwell Securities in Toronto.
This has been the story since the third-quarter of 2003, when sharply lower loan losses - which had soared in the previous year because of bad loans to the telecom and energy sectors - propelled the banks back into the market's good books.
But analysts wonder whether some of the banks, particularly Canadian Imperial Bank of Commerce, might decide to set aside a hefty chunk of money to guard against civil actions stemming from the banks' connections to Enron.
CIBC, which along with Toronto-Dominion Bank and Royal Bank of Canada are involved in a $25 billion class-action lawsuit by Enron shareholders, has already paid $80 million to US regulators to settle charges it "aided and abetted" a massive accounting fraud at the energy trader.
But the huge $6.7 billion reserve set aside earlier this month by Citigroup Inc to deal with civil liability - a big chunk of which is expected to be related to Enron - seems to have upped the ante for Canada's banks.
"With the litigation reserve taken by Citigroup, the probability of CIBC taking another charge (to establish a reserve) for Enron appears quite high, especially given that CIBC is mentioned numerous times in court documents," National Bank Financial's Robert Wessel wrote in a research note last week.