Canada's two largest banks opened 2011 with better-than-expected profits thanks to the healthier economy, the clearest sign yet that the sector has moved well beyond the financial meltdown.
But the post-crisis era is also one in which their customers are likely to take out fewer loans, as Canadians seek to curtail their record debt loads.
The core Canadian consumer and business lending businesses at both Royal Bank of Canada and Toronto-Dominion Bank showed double-digit profit growth for the first quarter of this fiscal year, which runs from November to January.
While low interest rates have been eating into the profit margins that those businesses earn, they have also been spurring consumers to take on ever-higher debt loads, boosting lending volumes.
But TD cautioned that it expects the profit growth of its Canadian lending operations to "moderate" because indebted consumers are curbing their borrowing.
A report to be released Friday by PricewaterhouseCoopers LLP suggests that banks would be wise to look for new growth areas, as the willingness of North American customers to spend and borrow decreases.
It notes that personal and commercial banking was the strongest growth area for the country's six largest banks last year, helping them to earn record total profits of $20.4-billion in 2010, more than $6-billion higher than 2009. The biggest gains were made in mortgages, while higher fees also helped.
Overall, TD earned $1.54-billion, or $1.69 per share, this quarter, up from $1.3-billion or $1.44 per share a year ago. Adjusted for unusual items the profits amounted to $1.74 per share, while analysts were expecting earnings of $1.54 per share.
Royal, the country's largest bank, earned a record $1.84-billion, or $1.24 a share in the quarter that ran from November to January. That was 23-per-cent higher than the same period a year ago, when it earned $1 per share.
RBC's cash earnings of $1.26 per share easily topped the Street's estimate of $1.01 per share, marking the first time that RBC beat expectations in a year-and-a-half.
Much of TD's strength this quarter came from a rebound in its U.S. lending operations, which reported profits of $320-million (Canadian), up 77 per cent from a year ago, although the results included a gain related to taxes of $24-million.
"Based on our growth expectations, we expect our net quarterly earnings to be approximately $300-million (U.S.) for the remainder of the year," TD said of its U.S. operations.
In December the bank agreed to buy Chrysler Financial for $6.3-billion (U.S.). "Even though we continue to worry about the macroeconomic environment, the fact is that some of the disruptions on the ground are creating opportunities for us and we will continue to take advantage of them," TD chief executive officer Ed Clark told analysts on a conference call.
RBC's international banking division, which includes the bank's struggling U.S. lending operations, made $24-million, compared to a loss of $57-million a year ago. This marked the first time since the beginning of the crisis nearly three years ago that the division made money, although the troublesome lending operations in the U.S. southeast did not show a profit yet.
"I think it's a sign of steady improvement," said RBC chief executive officer Gordon Nixon, adding that the bank is starting to see "some stabilization" in the U.S. credit environment.
Analysts expressed concern about Royal's strong trading revenues, which once again were a key driver of the bank's profits. Trading revenues tend to rise in volatile markets and analysts don't view them as a sustainable source of earnings. Barclays Capital's John Aiken noted that RBC's trading revenues topped $1-billion again this quarter, having fallen to about $200-million two quarters ago.
TD saw its wholesale banking profits drop 36 per cent as trading revenues continued to soften. Last year's results had marked a record, and TD signalled that the lower earnings from this division were not temporary, characterizing them as "solid results."
Royal Bank (RY)
Close: $59.92, up $2.98
TD Bank (TD)
Close: $83.60, up $3.10