Toronto-Dominion Bank's third-quarter profit set a new record for Canada's second-largest lender.
TD made $2.11-billion last quarter, or $1.11 cents per share. After stripping out one-time items, the earnings totaled $1.15 per share, handily beating analyst estimates.
The third-quarter profit came in 37 per cent higher than the year prior, but the annual comparison can be misleading because TD also reported a large one-time loss in 2013 in its insurance arm.
Underlying TD's success is sustained growth in its Canadian retail division – which includes wealth, insurance and personal and commercial banking.
Although personal loan growth is slowing – up 5 per cent from the year prior, and up only 3 per cent in the personal real estate division – TD has helped to offset the effect on its earnings by striking acquisitions. In the recent past TD has acquired Epoch Investments, Target Corp.'s U.S. credit card business and most recently, half of the Aeroplan credit card portfolio from Canadian Imperial Bank of Commerce.
Growth in TD's U.S. retail banking division still hasn't taken off, with earnings climbing to $449-million (U.S.), up 4 per cent from the year prior. This rise was largely driven by non-cash gains from lower loan loss provisions. However, the division exhibited a steady rise in profits over four straight quarters.
Capital markets has been one of the hot sectors for Canadian banks this quarter, but TD's arm didn't benefit as much as its rivals. Although earnings climbed to $216-million (Canadian), up 46 per cent from the year prior, the third quarter of 2013 is a rather weak one for a comparison. The bank's wholesale earnings were largely in line with its profits in the past two quarters.
Despite the record profit, chief financial officer Colleen Johnston stressed this isn't an easy market to mint money in. "The banks are still facing a pretty tough operating environment, and we are seeing slowing loan growth and low interest rates," she said in an interview. The yield on the five-year Government of Canada bond has dropped more than 40 basis points since the start of the year, which weighs on margins.
Ms. Johnston acknowledged that TD's earnings were boosted by acquisitions, some foreign exchange gains as well as a drop in credit losses, which are now at their lowest level in five years. "It's hard to believe that we can sustain that kind of level," she said.
TD entered 2014 as one of the most negative on the Canadian banking outlook, but during the second quarter the bank revised its stance and management told investors they should not fear any major changes to the overall operating environment for the remainder of 2014.
The change of heart came after TD reported a profit of more than $2-billion, after adjusting for one-time items, for the second straight quarter. Almost every division of the bank performed well, and TD was even lucky enough to see a big drop in provisions for credit losses.
While Canadian banking has been humming, the lender's U.S. outlook isn't as rosy. Although TD is making decent profits south of the border, solid growth has been hard to come by.
The lender isn't alone in its experience. The U.S. economy is growing, but not quickly enough to generate big bank earnings, forcing lenders to compete for loans by lowering their rates and eating into their margins. The U.S. regulatory environment has also changed dramatically, requiring banks to recalibrate their earnings expectations.