As economic headwinds gather, Big Six banks stand their ground

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For months, Canada's biggest banks have been warning of economic headwinds in the domestic market that threatened to shake their retail businesses.

That slowdown took hold in the second quarter, with slower retail loan growth and fierce competition for new clients eating into results. But the Big Six have still managed to turn in relatively strong earnings, with Royal Bank of Canada and Canadian Imperial Bank of Commerce the last to post results that seemingly defy the pull of slowing consumer lending.

RBC's retail loan growth, excluding acquisitions, was up just 1 per cent over the first quarter, but the bank proved that it still has earnings power, posting a profit of $1.94-billion that was down from the blockbuster first quarter but up 24 per cent from a year ago.

CIBC made $876-million, rising 8 per cent from the same period in 2012 and regaining growth following a slower first quarter.

Canada's six largest banks earned $7.5-billion in the quarter, up 6.6 per cent from the year earlier.

The question now is how the banks will navigate through the slowdown spurred by a cooler Canadian housing market and sky-high consumer debts.

Most have a certain strength they can lean on – Toronto-Dominion Bank's U.S. operation, Bank of Nova Scotia's Latin American division – but some argue that being well rounded will get them through any storm.

"We're very committed to our diversified business model," RBC chief financial officer Janice Fukakusa said in an interview, adding that the bank isn't relying on one specific division to give it a leg up. RBC's domestic banking operation contributed 54 per cent of its profit last quarter, while CIBC's made up 69 per cent of its bottom line.

That could be problematic for CIBC, noted RBC analyst Andre-Philippe Hardy, because it is the "most exposed of all the Canadian banks to a slowing rate of growth in Canadian consumer lending" and has "relatively greater exposure to personal/mortgage lending than peers."

However, both CIBC and RBC have seen stronger profits from their wealth-management units. This area is particularly hot for most banks because equity markets have been rising, boosting the value of client portfolios. The banks earn fees as a percentage of this value, so the higher it is, the more they make.

Wealth management is so hot that numerous banks, including RBC, noted that they would be open to acquisitions. TD and CIBC both recently struck deals in the United States.

As it released its earnings results, CIBC also said it is considering ending its long-standing relationship with Aeroplan.

CIBC and Aimia Inc., Aeroplan's parent company, have been partners for 20 years, but their current contract expires at the end of the 2013 calendar year. During the first quarter, CIBC hinted that the contract may not be renewed, and on Thursday, the bank laid out plans to end the relationship and launch its own travel rewards credit card that will likely offer clients the ability to redeem points on any airline.

Should CIBC end the Aeroplan contract, the bank will spend $50-million to market the new card in hopes of retaining customers. However, chief executive officer Gerry McCaughey said he knows the other banks will go after these clients. "Frankly, we expect several market players will also spend significantly," he said, adding that he foresees some client attrition.

CIBC does not disclose how much it currently makes from the Aeroplan arrangement, but David Williamson, head of retail banking, said more information may be provided if the contract isn't renewed.

In a widely expected move, CIBC renewed Mr. McCaughey's contract as chief executive officer for another four years. Mr. McCaughey became head of CIBC in 2005, and had his contract renewed in 2009. The new contract, announced Thursday, provides the 56-year-old with another four-year window.