Big banks’ profits defy low growth forecasts

Four of Canada’s top financial institutions have reported big quarterly gains despite low interest rates, high consumer debt

Canada’s big banks have defied predictions that blustery economic headwinds would finally catch up with Bay Street and blow away some of their profit growth.

Four of Canada’s Big Five banks have reported third-quarter results this week. They have breezed ahead of analysts’ expectations that a low-interestrate environment, high consumer debt loads, lower oil prices and generally sluggish economic conditions would limit growth potential.

All four beat the Street’s expectations by a wide margin.

CIBC, which reported Thursday, saw third-quarter profits soar by nearly 50 per cent to $1.4 billion, driven by the sale of its minority stake in U.S. money manager American Century Investments.

Also on Thursday, TD said it raked in $2.4 billion, a 4-per-cent year-over-year gain.

A day earlier, RBC reported record net income of $2.9 billion, up 17 per cent from a year ago, partially due to the sale of an insurance business.

The bank surprised some analysts by raising its quarterly divided by two cents to 83 cents per share.

BMO, the first of the Big Five to report this week, saw profits grow 4 per cent to $1.3 billion during the quarter.

The performance of the big Canadian banks is seen as a bellwether of the economy because their lending, deposit and capital markets businesses are dependent on how consumers and corporations are faring.

That helps to explain why their U.S. segments outperformed Canadian banking operations in the most recent quarter — the American economy is performing much better.

The strong results were surprising, but some of that may have been due to investor psychology in which bad news is overplayed and good news underestimated, said John Aiken, a banking analyst at Barclays.

“I felt the slowdown in the economy would have had a greater impact on the banks’ bottom line by this stage in the game,” he said.

“But what we’re seeing is very solid resiliency amongst the group. They’re able to deflect most of the pressures of the weakened economy away from their operations.”

Across the board, big gains have been driven by operations in the U.S., where the economy is gathering steam, as well as capital markets, as enthusiastic traders have pushed stock markets close to new records. Meanwhile, their Canadian operations are pretty much stagnant, said Colin Cieszynski, chief market strategist at CMC Markets.

The banks did see loan-loss provisions rise compared to the same quarter a year earlier, but many were lower than they were in the second quarter of this year, suggesting losses on bad loans seem to have reached a bottom and recovered along with oil prices, Cieszynski said.

“This quarter covers the May-to-July period, the February bottom was in the previous quarter,” he said, adding that could change if oil prices take another dive.

“I also think pausing on loan-loss provisions may only be a temporary reprieve, depending a lot on what happens with commodity prices.”

Aiken added that the bank earnings tend to be a lagging indicator of the state of the economy. If someone loses their job, he said, it takes a while for them to start defaulting on their loans and it’s going to take even more time before the bank recognizes that and books an impairment.

Scotiabank is slated to report on Aug. 30, and National Bank, Canada’s sixth-largest, will wrap up the season on Aug. 31.

CIBC’s third-quarter profit soared to $1.4 billion, while TD bank pulled in $2.4 billion, up 4 per cent from a year ago. RBC and BMO also reported strong earnings this week