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BMO Capital reduced its earnings forecasts for the bank by 7% Wednesday, telling investors to expect lower trading and capital markets revenues this year alongside higher loan losses.

Analyst Ian de Verteuil said lower expenses will cushion some of the impact but after removing all "unusual items" from his calculations he expects the sector to essentially have no earnings growth in 2008 when compared with 2007. He also said share buybacks are unlikely this year and broadly speaking, all banks are equally affected by his revised forecasts.

In a research note, Mr. de Verteuil wrote:

To date, we believe the bulk of the market's concerns have been focused on liquidity pressures and securities valuation.

There are more challenges ahead, includiing a need for more realistic earnings forecasts (as we have done today), the risk of counterparty failures and the reality of more modest dividend increases and share buybacks.

That said, the analyst believes investors can take comfort in the fact that dividends appear very safe and bank business models remain very defendable.

He maintained his "market perform" rating on the overall sector and reiterated his "outperform" ratings on both TD Bank (TD) and National Bank of Canada [NA.TO].

Source: BMO Capital Reduces Bank Earnings Forecast