TD Bank, CIBC brace for tough 2012

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The first two Canadian banks to roll out fourth-quarter earnings beat expectations for a bleak end to the year, but investors appear pessimistic that the strong profits will last into 2012.

Soon after Toronto-Dominion Bank and Canadian Imperial Bank of Commerce reported strong earnings that topped analysts estimates on Thursday, both banks saw their shares trade lower as the markets began looking ahead to what could be a very sluggish year ahead.

Persistent low interest rates, slimmer margins on loans, and ongoing economic upheaval in European markets that will play havoc with bank trading revenues are casting a long shadow over the sector for the coming year.

Speaking to analysts after his bank posted higher profits, TD chief executive officer Ed Clark cautioned against too much "wallowing in pessimism," since the fourth quarter turned out better than most expected.

TD, Canada's second-largest bank by assets, made $1.57-billion or $1.69 a share during the quarter. That compared with profit of $994-million or $1.07 during the same period last year.

Revenue rose 13 per cent to $5.7-billion.

CIBC said profit climbed to $794-million or $1.90 a share from $500-million or $1.17. Revenue was little changed from the year-ago period. The bank benefited as its income-tax expense plunged to $249-million from $742-million.

Both banks saw their shares fall during afternoon trading, but regained some of that lost ground to finish down between 

1 and 2 per cent.

While Mr. Clark did his best to temper the negativity surrounding the current outlook for banks, his counterpart at CIBC, Gerry McCaughey, acknowledged the outlook for next year does look tough for the sector, given low interest rates and very slim margins for the banks.

"The external environment remains very uncertain," Mr. McCaughey told analysts. "Interest rates are expected to remain low and growth rates in consumer credit should continue to grow which should help offset some of these headwinds."

These forces are putting pressure on the banks' ability to expand their loan books. In a low-rate environment, the lenders are competing more fiercely to increase loan volumes, at slimmer profit margins, to keep boosting profit.

The banks doled out more money, but made less on every dollar they lent.

"Domestic revenue growth is likely to be a challenge over the next year based on the low interest rates and lower loan growth," John Reucassel, an analyst at BMO, said in a research note. In particular, he said CIBC is putting up numbers "reflective of a low-risk, low-growth business for the foreseeable future."

TD increased its loans to $305.8-billion, an gain of just over 12 per cent from a year ago, which was fuelled mostly by residential mortgages and business and government lending. But interest income didn't keep pace, rising 10 per cent in the past year, and staying roughly flat from the third-quarter.

CIBC's total loan book expanded to $185-billion from $176.9-billion, a 4.5 per cent increase. Most of the growth came from mortgages. However, net interest income actually declined to $1.6-billion from $1.65-billion a year earlier.

Both banks performed better in wholesale banking than analysts expected, which may signal that the fourth quarter won't be as bad as expected across that period, since trading profits were expected to take a big hit.

CIBC said profit in its wholesale business surged to $172-million in the fourth quarter, up from $145-million in the third quarter and a loss of $56-million in the fourth quarter of the prior year.

Capital markets revenue, which includes trading at CIBC, rose to $251-million from $233-million a year ago, and was unchanged from the third quarter. CIBC attributed some of the strength to foreign exchange trading.

In TD's wholesale banking unit, where trading results are reported, the bank recorded a 33-per-cent increase in profit to $288-million, on an adjusted basis. The bank said the increase was due mostly to improved foreign exchange trading and equity trading income, which offset a big drop in credit and interest rate trading income.

Over all, trading-related income fell to $286-million from $383-million last year, driven mostly by a steep drop in interest rate and credit trading income, which evaporated to $31-million from $162-million.