Canadian bank headquarters stand on Bay Street in Toronto.Brent Lewin/Bloomberg
Two more large Canadian lenders churned out solid fourth-quarter earnings, extending a string of encouraging profits from the Big Six banks, but there is a growing consensus in the industry that next year will be much more challenging.
On Thursday, Canadian Imperial Bank of Commerce unveiled fourth-quarter earnings that easily beat analysts' expectations, while Toronto-Dominion Bank reported profit in line with analysts' predictions. For the full year, CIBC's net income jumped 7.9 per cent, after adjusting for one-time items such as restructuring charges, and TD's equivalent profit popped 6.1 per cent.
The struggle now is to replicate this performance. Throughout the week, the country's biggest banks have suggested there are darker clouds on the horizon.
Their concerns have largely manifested in cuts to return-on-equity (ROE) projections. ROE is a key profitability metric in the industry, and so far three of the four banks that have already reported fourth-quarter earnings have cut theirs, or cautioned it could be bumpy. The fourth, Bank of Nova Scotia, already did so last year.
On a conference call Thursday, CIBC chief executive officer Victor Dodig lowered the bank's ROE target to about 15 per cent. ROE was 16.8 per cent in fiscal 2016. He largely attributed the new outlook to tough macro-economic headwinds.
The cuts signal future earnings will be harder to come by – particularly in Canada. The domestic economy is growing slowly, so there's less juice to drive profit, and margins on products such as mortgages are rather thin. The banks hoped interest rates would start to climb this year, but the energy rout has forced them to rethink their projections.
Ottawa's recent crackdown on scorching housing markets in Toronto and Vancouver are also expected to weigh on growth.
TD held an investor day for its Canadian banking division in October, 2015, and projected 7-per-cent growth for the unit, but its projection assumed some rate increases. "Obviously the context has changed both around that and around real estate secured lending … so those are the two main factors that have caused us to change the outlook," division head Teri Currie said on a conference call. The bank now expects annual profit growth in the "mid-single-digits."
Canadian lenders are also wrestling with new capital rules. The more capital a bank must hold, the less it can invest in its businesses.
Despite the headwinds, Canada's banks aren't panicking because most have diversified businesses that give them exposure to other countries' economies. TD, for one, has a large retail bank in the United States, and it's starting to catch steam.
CIBC's fourth-quarter profit rose to $931-million from $778-million a year earlier – however, it is difficult to compare the two because the bank announced a large restructuring charge in late 2015. CIBC also announced another charge in the fourth quarter of 2016, but it was smaller, worth $134-million.
The bank's Canadian mortgage business was a standout last quarter, with loan growth hitting 11 per cent – much higher than its peers who have already reported. The hefty growth raised analysts' eyebrows because it comes at a time when the federal government and the banking watchdog have warned about the rapid rise of Canadian housing prices, particularly in Toronto and Vancouver, but executives stressed, on a conference call, that their risk assessment is thorough, particularly on uninsured mortgages.
CIBC's uninsured mortgages in and around Toronto and Vancouver also have lower delinquency rates than its Canadian average – just 0.07 per cent and 0.06 per cent, respectively, relative to the 0.25-per-cent average across the country.
TD's earnings climbed to $2.35-billion in the fourth quarter, compared with $2.18-billion the year before. But like CIBC, the bank also incurred a large restructuring charge late last year, which skews the comparison.
Looking at the full fiscal year, TD reported encouraging results out of its retail division in the United States, with the unit making $2.96-billion, up 19 per cent from the year prior. The rise helps put some growth concerns to rest. For many years this business delivered low returns on equity, owing to a slow economic recovery and tough competition for loans, which lowered margins.
Lately, though, the markets that TD operates in on the U.S. East Coast have shown good economic growth. TD also has ample funds to make loans. "Yes, it is a fiercely competitive market," chief financial officer Riaz Ahmed said in an interview, "but we're well positioned with a clean balance sheet. … We have a lot of room to grow in our loan-to-deposit ratio."
TD's Canadian banking arm had a much quieter year, with earnings barely rising. That matters because they comprise 67 per cent of total profit.
Tim Kiladze