The outlook for Canada's largest banks was already improving as they turned the page on a tough year in 2016. But the bar has risen higher still as, one after another, the Big Six outstripped estimates for fiscal first-quarter profit.
Solid across-the-board results can make the anxieties from a weak oil and gas sector that dogged the banks last year feel like a distant memory. But prospects for the next three fiscal quarters are still clouded with uncertainty.
The established U.S. political order is lurching through an upheaval, Canada's oil patch is still working through higher unemployment, and Canada's largest housing market remains dangerously hot. The question is whether banks can carry the momentum from lofty first-quarter returns through the balance of the year.
"We still haven't seen a return to investment in Alberta, albeit we have higher energy prices," said Dave McKay, chief executive officer of Royal Bank of Canada, in an interview last week. "All in, you're seeing some very healthy signals of the credit quality in our economy."
Several banks set aside less money to cover soured loans in the first quarter, shrinking pools of cash known as provisions for credit losses, or PCL. At RBC, provisions were 28-per-cent lower than a year earlier, or about $92-million better than most analysts expected. Bank of Montreal and National Bank of Canada both saw 5-per-cent improvements to PCL year over year.
But while several banks enjoyed recoveries in oil and gas loans, suggesting some of the fear about the energy sector was overblown, losses are still dragging on some portfolios. Toronto-Dominion Bank, the last major bank to report earnings this quarter, set aside higher provisions thanks to auto loans and credit card debt gone bad in the U.S. Some analysts also worry there is still more pain to come in energy-rich provinces such as Alberta, where job losses can put pressure on consumer loans and credit card repayments.
"So far, we haven't seen much of that," Mr. McKay said.
As banks pushed profits higher, they also padded out comfortable capital buffers. Four major banks reported a common equity Tier 1 ratio – a measure of financial stability watched by regulators – of 11 per cent or above. TD is knocking on the door at 10.9 per cent, and National Bank posted a suddenly healthy ratio of 10.6 per cent.
Four banks also hiked their quarterly dividends, led by TD's 9-per-cent increase to its payout, while three others unveiled plans to buy back shares.
But the robust capital levels also give the banks choices – "optionality" in banking lingo – to reinvest in core businesses being reshaped by new technologies, and to go hunting for acquisitions.
"It is difficult to predict the timing because M&A doesn't work in neat packages," said Riaz Ahmed, chief financial officer at TD, in an interview. "So I'd say that we're always looking for interesting opportunities for us that would make sense from a financial point of view."
Timing aside, the other unknown is whether Canadian banks can afford to be buyers. Their share prices keep climbing higher – the S&P/TSX banks index is up 6 per cent so far in 2017 and nearly 35 per cent over last year – but U.S. bank valuations have also soared.
With interest rates set to rise, Donald Trump's election as U.S. president was greeted with a surge in optimism, thanks to his promises of large-scale deregulation and corporate tax reform. And, although the details are still vague, and his administration has shown signs of instability, Canadian bankers are still looking south of the border for growth while the domestic economy remains sluggish.
TD, which has more branches in the U.S. than in Canada, reported a 6.5-per-cent increase in first-quarter profit from its U.S. arm on Thursday, to $800-million. Profit from U.S. retail banking at BMO rose 4 per cent from a year earlier.
"I think there is uncertainty as to what the specifics might entail, and perhaps in terms of the timing of when some of these initiatives could be put in place," Mr. Ahmed said. "However, over all, the market remains bullish on its expectations that the U.S. will accelerate growth."
TD, which surpassed RBC as the country's largest bank by assets as of Jan. 31, wrapped up the first-quarter earnings season on Thursday reporting higher profit of $2.5-billion, or $1.32 a share, compared with $2.2-billion or $1.17 a year earlier.
Adjusted to exclude certain items, earnings per share was $1.33. Analysts surveyed by Bloomberg expected $1.27 a share.
Outsized first-quarter profits aside, banks face a range of uncertainties and challenges ahead in 2017. Here are five things worth watching.
Capital markets returns
Capital markets boomed in the first quarter, with year-over-year profits up anywhere from 16 per cent at RBC to 66 per cent at TD, mostly because of higher trading volumes. With U.S. policies and Brexit still taking shape, there could be more volatility in store, but consistency is usually hard to come by.
Slow Canadian growth
Canada's large banks still make most of their money from their cornerstone domestic retail operations; with Bank of Canada Governor Stephen Poloz offering a less-than-rosy analysis of "persistent economic slack in Canada" this week, modest retail growth may be the best that bank CEOs can hope for.
There is no obvious sign that big banks will add to the billions of dollars in restructuring charges they collectively booked in recent years. But with low interest rates keeping spreads compressed, and rapid technological change reshaping all corners of banking, cost-cutting is now a constant fixture.
Bank executives are joining a chorus of concern over skyrocketing house prices in the Greater Toronto Area. RBC chief executive Dave McKay went so far as to say he is "concerned" about a "dangerous mix" of factors pushing prices up, and that Toronto may need to consider Vancouver-style measures to cool the market.
CIBC's bid for PrivateBancorp
CIBC is still waiting. The bank's bold $3.8-billion (U.S.) bid to buy Chicago-based PrivateBancorp Inc. is in limbo thanks to a run-up in U.S. bank stocks. A shareholder vote, already once postponed, has yet to be rescheduled. And with a June 29 deadline to fish or cut bait, PrivateBancorp's elevated share price hasn't budged. Can CIBC seal the deal?