Banks adrift as concern builds
Economic future looking more uncertain
About the only thing that can be said with certainty about the economy is that the future has rarely been more uncertain. The U.S. Fed is poised to curtail its controversial bond buying program with many economists warning of potentially painful consequences for much of the world. Europe’s debt isn’t getting any better, it just keeps morphing, while here at home Bank of Canada governor Stephen Poloz hinted that economic growth might be heading in the wrong direction, potentially necessitating a cut in the already rock-bottom overnight rate.
Canada’s banks, bulwarks of stability in the financial crisis, appear more and more rudderless, apparently unable to power through the fog as they did so successfully in the dark days of 2008 when it seemed the rest of the global financial system was coming apart at the seams.
Fourth-quarter earnings season is almost over — Bank of Nova Scotia, the last up, comes out Friday — making for one of the shortest earnings seasons in recent memory. Move on, nothing to see here, the message seems to be. For the most part the results paint a murky picture.
Royal Bank of Canada on Thursday posted a profit of $2.1 billion, up 11 per cent from last year, thanks to strong loan growth at the domestic retail operation and solid performance in capital markets. Digging beneath the headline numbers, the retail banking results were significantly bolstered by the acquisition of auto lender Ally Canada. Stripping that out, loan volumes show the same weakening trend observed across the banking sector as overleveraged consumers put the brakes on borrowing.
That’s the main hurdle for lenders. Over the past decade households have been spending big on real estate, leading many observers including the International Monetary Fund and the OECD to warn of a potential housing bubble. If it collapses, Canadians could be in for a very rough stretch, they say. For their part, the banks (and their economics departments) acknowledge that while housing values may be high, the sector is on track for a “soft landing.” Real estate will moderate over time, they argue, paving the way for a healthy rebalancing of consumer debt. So far, the jury is out.
Toronto-Dominion Bank also posted higher profits at most of its operations. For the quarter, the country’s secondbiggest lender reported net income of $1.6 billion, slightly up from last year. Domestic retail banking, the biggest driver, had a profit of $948 million, up 13 per cent on stronger residential mortgage lending.
The U.S. retail bank had income of $369 million, up from $316 million last year, partly due to the recent acquisition of the Target credit card business and higher deposits. TD has bet big on U.S. expansion but it’s still waiting for vindication. While these latest results are clearly good news, observers are reluctant to proclaim TD has turned the corner.
Canadian Imperial posted a profit of $836 million, down marginally from $852 million even though its retail business with earnings of $610 million, compared to $569 million in the same period last year.