Canadian Banks Set to Report

Bank of Montreal [BMO:TSE] will start the second quarter earnings season for banks in Canada, providing a tone for the rest of the industry. Expectations for the sturdy six have been set extremely high as the Canadian banks have continued to report huge profits quarter after quarter during a financial crisis. Earnings estimates are expected to be up around 40 per cent from last year; revenue streams from trading and lower loan losses are continuing to improve the bottom line.

However, great expectations can lead to disappointment, especially with a rising Loonie decreasing foreign income and European loan problems yet to be factored into the estimates.

"Expectations have just gotten very, very high for the banks and that's probably the biggest headwind to stocks in the near term," Edward Jones analyst Craig Fehr said [1].

On the other hand, a small drop in the value of the shares after earnings could be a buying opportunity. Being rated the best banking system in the world, many investors may be tempted to invest money into the strong fundamentals.

"Investors should absolutely be investing in Canadian banks," said Barclays Capital bank analyst John Aiken. "With significantly less exposure to Europe and the additional weakness in the U.S. economy ... you've got very strong downside support [1]."

The market saw extreme volatility on Tuesday May 25 as traders prepared themselves for a slew of reports, and many are buying up bank stocks that have been beaten up during this market correction. Shares of CIBC [CM:TSE] rose 1.5 per cent today and is one of few stocks that have not seen their stock's value decrease during the month of May.

Canadian Imperial Bank of Commerce, Toronto-Dominion Bank [TD:TSE], Royal Bank of Canada [RY:TSE], and National Bank [NA:TSE] all report earnings on Thursday, which will definitely create a mixed bag of winners and losers. Bank of Nova Scotia [BNS:TSE] report June 1.

How to Protect Your Gains
Those that are pessimistic on earnings should consider writing calls for additional income. Option premiums for the month of June are paying nearly 3 per cent. By the end of this week, the risk premium will have disappeared which could provide a cheap way to close the options and hedge your investments.

The big five banks have been given a rating of 9 on the Minh-dex Maple Leaf Fund and have beaten the TSX over the past two weeks.

[1] Quotes obtained from a Reuters article.