CIBC, TD fall on earnings miss

TORONTO • The coronavirus pandemic has driven Canada’s biggest banks into a complicated game of tug of war, as the Big Six try to ensure they have enough in the tank to guard against COVID-19-related loan losses without eating up an unappealing amount of capital.

Another earnings season for the Big Six lenders ended Thursday.

Both Canadian Imperial Bank of Commerce and Toronto-Dominion Bank, missed earnings expectations after pumping up loan-loss reserves because of COVID-19.

“These are unprecedented times,” Bharat Masrani, TD’s chief executive, said during a conference call Thursday afternoon. “The reason earnings are depressed is because of the level of allowances the bank has taken. And that is based on our current view of what the future looks like.”

That future is hard for even the economic wizards at the biggest banks to predict, which put the Big Six in something of an awkward position this week. Analysts and investors smiled on big loan-loss reserves, but were less happy if such reserves were deemed insufficient, or if the lenders used up a bit too much capital.

“The push and pull this quarter was between building allowances and preserving capital, and the banks that were able to achieve this balance were rewarded,” said Rob Wessel, managing partner and co-founder of Hamilton ETFs.

TD reported second-quarter earnings of approximately $1.5 billion, down 52 per cent from a year earlier. Credit-loss provisions for the three months ended April 30 were $3.2 billion, five times more than the $633 million set aside a year ago.

However, TD’s common equity tier 1 ratio — a measure of its capital strength

— slid to 11 per cent from 11.7 per cent a quarter earlier. Shares of TD had gained about 12 per cent from Monday morning to Wednesday evening, but tumbled 3.8 per cent on Thursday to $60.29.

“We believe TD investors expect the bank to be in a relatively stronger capital position, which puts some pressure on the bank,” National Bank Financial analyst Gabriel Dechaine said.

Similarly, CIBC shares had been up more than 10 per cent for the week before they dropped two per cent on Thursday to $89.94, after the bank reported second-quarter credit-loss provisions of $1.4 billion, an increase of 454 per cent from a year ago. Net income for the three months ended April 30 was $392 million, down 71 per cent from 2019.

Adjusted for an acquisition-related expense, CIBC reported diluted earnings per share of 94 cents, down 68 per cent year over year, and below the $1.48 consensus of banking analysts.

“The miss to expectations appears primarily driven by higher (provisions for credit loss), with the market largely looking through the beat/ miss implications with a focus on whether Q2/20 will prove to be the peak loss rate this cycle,” Eight Capital analyst Steve Theriault said in a note to clients.

TD, meanwhile, announced adjusted diluted earnings per share of 85 cents, two cents below analysts’ consensus of 87 cents a share, and well off the $1.75 reported a year earlier.

The main business lines at both CIBC and TD were hit hard by COVID-19. TD said net income at its Canadian retail unit was approximately $1.2 billion, which was down 37 per cent year over year, as loan-loss provisions jumped by $873 million as a result of a bleaker economic forecast. Its U.S. retail banking line was hit even harder, with net income falling 73 per cent from a year earlier to $336 million.

CIBC’s Canadian personal and business banking unit’s net income declined 64 per cent to $203 million, as more provisions had to be taken for performing loans, or those that are still being paid back.

On a pre-provision basis, the unit’s year-over-year earnings dropped seven per cent, driven lower in part by pandemic-related effects, such as relief for credit-card customers that helped reduce revenue.

Similar increases in credit costs were reported by all Big Six banks this week. For example, Royal Bank of Canada announced quarterly credit-loss provisions of $2.8 billion, a 564 per cent hike from a year earlier, along with a 54-per-cent tumble in profit to $1.48 billion.

But RBC’s reserve building is “prudent in the context of the economic downturn, particularly given the high level of uncertainty around the trajectory of the eventual recovery,” Credit Suisse analyst Mike Rizvanovic said in a note on Thursday.

“As such, we believe that some of (RBC’s) peers that appear to have taken a less conservative approach on provisioning will merely delay an inevitable increase in future quarters, resulting in a slower path back down to more normal loss ratios.”