Dundee Capital Strategist Predicts Job Cuts at Canadian Banks

Canadian banks will likely join their U.S. counterparts by cutting jobs when they report quarterly and year-end results next week, Dundee Capital Markets portfolio strategist Martin Roberge predicted.

Canadian banks are struggling with thin net interest margins and weak activity in both lending and capital markets. But they have been reluctant to pare down employment to offset weak revenue growth prospects, Mr. Roberge told clients. As a result, productivity continues to fall with no earnings recovery in sight, he said.

While Canadian banks may historically be quick to cut labour costs when revenue growth prospects are bleak, employment growth remains 2.9% year-over-year. Labour costs are up 5.9%, while revenue growth is nearly flat at just 1%, Mr. Roberge noted.

He said:

The net result is a marked deterioration in productivity at Canadian banks. This is a disturbing development given that a productivity rebound has traditionally preceded all key rebounds in relative price and earnings strength.

He added that the banks are likely past their worst point in terms of relative price performance but the group still lacks the earnings leadership for price strength to persist. Anything short of layoff announcements from Canada’s banks will prolong what Mr. Roberge called the “Chinese-water-torture” decline in productivity, threatening the 2009 earnings outlook.

For the rest of 2008, he predicted that Canadian banks will do no better than matching the broader market’s performance.