Canadian banks feast on consumer borrowing
Policy-makers may fear debt levels, but lenders lap up profits
TORONTO – Stratospheric consumer borrowing is a worry for policy-makers but so far it’s been nothing but good news for Canadian banks, which have enjoyed a string of outsize profits driven largely by retail lending.
Toronto-Dominion Bank and Canadian Imperial Bank of Commerce reported results Thursday, both ahead of analyst expectations even as the Bank of Canada voiced its sharpest warning yet on over extended households and the potential for a housing bust.
Lenders have paid scant attention to previous admonitions from Bank of Canada governor Mark Carney and it’s unlikely things will be any different this time.
Canadian retail lending is going gangbusters for both CIBC and TD, especially on the mortgage side. Indeed, despite signs that housing prices are starting to soften, players have been cutting prices as a way to crank up volume and boost profits.
With mortgages outstanding in Canada close to a record high, many lenders are making more home loans than ever.
Other countries have experienced similar lending booms, but several factors make the Canadian banking market unique.
First is the plentiful supply of government-backed mortgage insurance enabling lenders to protect themselves from the risk of default. Second is the concentrated nature of the market with five big lenders accounting for well over half of consumer loans such as mortgages, a structure that puts pricing power firmly in the hands of the banks.
Carney can only wring his hands at what he’s seeing because players have little incentive to hit the brakes. They make money when consumers borrow and the downside when borrowing becomes excessive has been mostly eliminated by judicious use of Canada Mortgage and Housing Corp. insurance that covers virtually all their costs when customers fail to meet their obligations.
Observers warn there could be fallout for the banks if there’s a major correction since people who can no longer pay their mortgages often get into trouble with their auto and credit card debt as well. But that scenario is hypothetical for now as most economists are calling for continued slow growth in the economy and a soft landing in housing.
That reality is plain to see in the results of both CIBC and TD.
CIBC, which is focused almost exclusively on Canada, posted a profit of $852 million for the three months ended Oct. 31, up about 13 per cent from last year. By far the biggest driver was the retail bank with income of $569 million, down five per cent. Given that the Commerce recently shuttered its FirstLine mortgage brokerage business, that’s not a bad result. Consider also that return on investment came in at a whopping 57 per cent, down from 65 per cent last year.
To put these numbers in context, it’s helpful to remember that many U.S. and European banks boast ROEs barely into the double digits.
TD had a profit of $1.6 billion, up from $1.59 billion.
Once again the main driver was the domestic retail operation, with income of $806 million, up seven per cent on higher mortgages. ROE is at nearly 42 per cent, up from 36 per cent last year.