Some of Canada’s big banks mixed are girding for the possibility of mergers by next fall, Standard & Poor’s says in new report.

“The banks have been building up their capital positions and preparing themselves for the possibility of presenting domestic merger proposals as early as fall 2004,” says the repoprt by Toronto-based analyst Lidia Parfeniuk. “The rhetoric was not shared among all major Canadian banks this quarter; however, it is clear that certain banks have the desire to maintain strong capital ratios and might not be contemplating dividend increases or share buybacks in 2004 to maintain flexibility, should the merger possibility arise.”

S&P says that the banks’ U.S. strategies also are being revisited, “as the Canadian banks recognize that it might not make economic sense to plow capital into small to medium acquisitions in the U.S. in the hopes of creating a decent U.S. platform years from now, if an opportunity to merge with a domestic player presents itself in a year.”

In this scenario, “the banks would automatically have scale and currency to make more decent acquisitions in the U.S. at some future time. Their larger statures, however, would probably not position them among the international league tables. Also, by then the U.S. banking landscape might have changed dramatically, should Bank of America Corp.’s acquisition of FleetBoston Financial Corp. set precedence for a flurry of mergers in the U.S., resulting in fewer opportunities for the Canadian banks.”

The report says that Bank of Nova Scotia’s regulatory capital ratios and quality of capital are the highest in the peer group. “This, along with the strong Canadian dollar, puts the bank in a good position to pursue mergers, acquitions and other strategic ventures.”

In the meantime, S&P notes fourth-quarter financial results for the major banks were mixed. It says the retail lending business performance overall was somewhat disappointing, “reflecting challenging revenue growth and narrowing net interest margins due to heightened domestic competition in retail products. Also, capital markets revenues were lower than expected relative to the previous quarter.”

“The results were balanced somewhat by continued cost cutting, and perhaps more importantly, improving credit quality, which allowed provisions to drop significantly,” it says.

“Overall, credit quality trends in domestic consumer and mid-size commercial lending remained stable. Consumer loan growth is showing signs of slowing at the tail end of a prolonged low interest rate environment, and record levels of consumer indebtedness. The data indicate that the credit cycle has run its course and the national economy continues to grow at a good, albeit slower, pace,” it notes.