Canada's largest banks are humming at home, but those that staked much of their futures on U.S. growth are finding it hard to make big money south of the border.
Unlike Canada, where personal and commercial banking units are generating blockbuster profits each quarter, the equivalent market in the U.S. isn't as lucrative in the best of times – and is especially challenging at the moment.
Even as the U.S. economy kicks into a higher gear, the mortgage business remains slow. Despite the resurgence in refinancings and new-home borrowing in 2012 and 2013, the market has since cooled.
Competition for loans of all sorts is stiff. To win clients, banks are undercutting each other on pricing, leading to slim loan margins.
"The U.S. operating environment for banks is quite tough right now," Toronto-Dominion Bank chief financial officer Colleen Johnston said in an interview, adding that, "margins are definitely under pressure," and coping with new regulation is "very, very tough."
The slog is frustrating for the chief executive officers of TD and Bank of Montreal, both of whom inked the biggest deals of their respective eras by scooping up U.S.-based lenders specializing in personal and commercial banking.
BMO has operated in the U.S. since the 1980s, but CEO Bill Downe doubled down on the Midwest market, where it owns Harris Bank, by acquiring Marshall and Ilsley for $4.1-billion in 2010.
TD's Ed Clark bought Banknorth in two parts starting in 2005 and acquired Commerce Bancorp to expand its footprint on the east coast in 2007. The deals amounted to more than $15-billion (U.S.).
Both BMO and TD are making money on these acquisitions, but the returns are rather muted.
In Canada, TD's personal and commercial bank arm generated a 43-per-cent return on equity last quarter; its U.S. equivalent reported a relatively disappointing 9.1 per cent. BMO does not report figures for both Canada and the U.S.
"In the U.S. market the profitability metrics are just lower," said David Beattie, senior credit officer at rating agency Moody's Investor Service. "It's a function of competition." Because the Canadian market operates as a quasi-oligopoly, the banks benefit from substantial pricing power at home.
As hard as BMO and TD fight south of the border, a slow macro-economic recovery leaves limited opportunity to improve the bottom line.
With significant operations in the Midwest – one of the hardest hit markets of the Great Recession – BMO is particularly susceptible to macro dynamics.
In January, Mr. Downe said he believed 2014 would mark a turning point. But halfway through the fiscal year, BMO's U.S. personal and commercial banking earnings are down 11 per cent from the first six months of 2013, before adjusting for currency changes.
Asked if he still thinks this is the year in which the market will turn more favourable, Mr. Downe conceded that it's "a little slower takeoff" than expected, but added that commercial lending has been strong.
"I still have confidence in the prospects," he said.
Once the economy picks up, both BMO and TD should see higher profits as rising interest rates generate fatter loan margins.
TD is in a particularly good position with $197-billion worth of deposits in the U.S., and loans of just $108-billion. That leaves a lot of money sitting around. Such funds are often invested in safe securities, and these investments pay very low returns at the moment.
TD's "deposit-rich balance sheet positions it quite well for a rising rate environment," National Bank Financial analyst Peter Routledge recently wrote in a note to clients, while adding a catch: "Interest rates are not rising in the United States, at least for the time being."
For now, both banks are able to wait it out. "They can be patient because they've got such profitable domestic properties," Mr. Beattie said.