TD, CIBC’s Q3 results beat expectations
Banks proving to be resilient as oilpatch downturn fallout is felt
Toronto-Dominion Bank and the Canadian Imperial Bank of Commerce reported higher third-quarter profits on Thursday, beating analyst expectations and rounding out a strong week for the industry, which so far has proven resilient in the face of ongoing economic struggles in the oilpatch.
“The Canadian banks are much more diversified than most of their global peers, providing downside protection when one or more of their operations are not performing up to potential,” said John Aiken, a financial services analyst at Barclays Capital.
“In this quarter, while there are some pressures on domestic retail banking, depending on the bank, we saw strength in wholesale from higher trading and advisory fees, as well as falling provisions in the energy patch offsetting the weakness.”
TD posted net income of $2.4 billion ($1.24 per share) for the three months ended July 31, up six per cent from $1.19 a share a year earlier. Adjusted earnings were $1.27 per share, up six per cent, which beat the consensus analyst estimate of $1.21. The performance was largely driven by higher than expected profit from its retail banking platform in the United States, cost management, and lower provisions for credit losses.
“We see these as a good set of results,” Citi analyst Ian Sealey said in a note to clients Thursday.
Meanwhile, it was domestic loan growth that helped push CIBC’s profit to $1.4 billion ($3.61 a share), up from $978 million ($2.42) a year ago. Adjusted net income, which excludes unusual items including the proceeds of a sale, rose to $2.67 per share, beating a consensus analyst forecast of $2.35.
CIBC’s provisions related to oil and gas loans were lower than in the second quarter, while TD’s were flat.
The financial reports followed similar expectation-busting results delivered this week by Bank of Montreal and Royal Bank of Canada.
Analysts said the banks are proving to be resilient, but the effects of economic challenges are beginning to be felt, particularly in oil-reliant regions where unemployment levels have risen.
CIBC, for example, reported higher lending loss rates in Canadian credit cards and unsecured personal loans in the quarter compared to a year ago, largely tied to oil-affected regions.
“The full impact of Alberta is still to be reflected in earnings,” said Aiken, the Barclays analyst.
He said CIBC had “impressive” growth on the domestic lending front across the country in the third quarter, which helped push profits higher. This is expected to continue based on comments from executives on Thursday, Aiken said, adding that it remains to be seen whether investors will get behind this strategy.
CIBC’s chief risk officer Laura Dottori-Attanasio told analysts on a conference call that the bank continues to view the residential mortgage book to be a “very good product” and is not concerned about markets such as Vancouver and Toronto where home prices have been rising rapidly.
“When we look at our greater Toronto and Vancouver markets, we have better scores than the national average, lower at origination loan to values, our serious arrear rates are much lower than our overall portfolio, and so the credit quality is very high in these particular segments,” she said.
“In fact, as we get worried about where the economy might be headed and the leveraged Canadian consumer, I think the area you want to look at more closely is in the unsecured product area.”
National Bank Financial analysts published a report this week that suggested a significant decline in house prices in Vancouver and Toronto would lead to lower consumption, which would trigger higher unemployment and lead to an increase in consumer credit losses.
Dottori-Attanasio told analysts CIBC has stress-tested a 30 per cent drop in home prices across the country along with a spike in unemployment to 11 per cent, and found it would cost the bank less than $100-million in mortgage losses.