The big five Canadian banks all have strong capital positions, but they also face higher loan losses and possible regulatory changes in the year ahead, says DBRS.

In a new report, the rating agency says that all of the banks have been “prudently growing capital levels.” That should position them to make acquisitions or return capital to shareholders, however it points out that capital adequacy requirements remain uncertain for 2010. As a result, DBRS says that it expects the banks “to maintain conservative Tier 1 capital levels.”

Nevertheless, DBRS says that it expects that 2010 will see strong performance from the banks’ retail banking segments. It also sees higher fee-based revenue in wealth management businesses in 2010, greater transaction volumes (and revenues), and improved investment baking revenue, but weaker trading levels.

Moreover, loan loss provisions are expected to rise and margins are expected to remain low. “Loan loss provisions are expected to remain fairly high in 2010, especially in the first half of the year given the continued high levels of unemployment and bankruptcies in Canada and the United States,” it says. Still, it maintains that credit costs “will remain manageable relative to earnings before loan losses.”

IE