Canada's banks are earning a lot of money again, and are poised to earn a whole lot more.
A little more than a year ago, bankers were accusing Bank of Canada governor Mark Carney of harming their profitability by decreasing key interest rates at a time when their own borrowing costs were rising because of the financial crisis.
Since then, the crisis has dissipated and Ottawa has bought more than $60-billion in mortgages to help lower their funding costs. With fewer competitors, the major chartered banks have raised the prices on a number of loans. All of that is giving a major boost to the bottom line, as proved Thursday when two of the five biggest, Toronto-Dominion Bank and Canadian Imperial Bank of Commerce, posted stellar profits that easily beat analysts' expectations.
Adjusted for one-time and unusual items, TD's profits for the fourth quarter were $1.31-billion, compared to $665-million a year ago. CIBC's quarterly profits were $644-million, up from $436-million.
When combined with Bank of Montreal's stellar results from last week, the three big banks collectively earned $2.3-billion between August and October, and $6.1-billion for the year.
The numbers, while proving the resilience of the Canadian banking system, may also present a public-relations problem for the banks, coming so soon after Ottawa put in place extraordinary measures such as the mortgage purchase program to get them through last fall's crisis and the recession.
While Canadians want their banks to be strong, it will be harder for them to be supportive when they see their own banking costs rising, Edward Jones analyst Craig Fehr said.
"That's the delicate dance that the banks will have to play," he said.
"There is no question as we move forward over the next several quarters there are going to be additional profits generated from the banks that come directly from the consumer."
National Bank's profits fell shy of the relatively high expectations that analysts had for it (the bank distinguishes itself by having no significant troublesome U.S. exposure), but chief executive officer Louis Vachon said it turned in one of its finest financial performances in recent years despite the year's recession.
A number of Canadian bank CEOs, including Royal Bank of Canada's Gordon Nixon and Bank of Montreal's Bill Downe, have predicted that something akin to a golden era of banking is around the corner. Profit margins should improve coming out of the crisis, while the destruction or exit of many players, including securitization firms and foreign banks means, less competition.
TD chief Ed Clark said Thursday that TD's stellar performance has come as a surprise to him, and the bank exceeded his own expectations.
"It was a better year than we anticipated going into it," he said.
"We've learned two lessons in the past year. First, you can have positive surprises in a challenging year. Secondly, you can always figure out other ways to outperform."
Peter Routledge, senior vice-president of financial institutions at Moody's, said that loan losses will peak soon if they haven't already, and if interest rates gradually rise, that will raise bank profit margins further.
"They do have sizable loan portfolios and balance sheets and when margins widen even a little, it makes a difference to the bottom line that's noticeable." While 2010's results might not be significantly better than this years, "if the recovery's moving forward in 2011 it should be a fairly healthy year for profitability," he said.
The Bank of Canada's benchmark overnight lending rate has fallen from 2.5 per cent to 0.25 per cent since RBC chief operating officer Barbara Stymiest told The Globe in October, 2008, that central bank rate cuts were gouging the industry's profitability. Analysts expect RBC to post profits of about $1.08 per share when it reports its results Friday, up from $1.01 a year ago.
A chunk of the profits that the banks have been bringing in stem from unusually high returns in their trading businesses as a result of the choppy markets.
Mortgages have also been a major reason behind the profit boost, as lower interest rates have pushed a number of Canadians into the housing market. Ottawa has supported the banks' mortgage businesses, the most important lending business they have, through the crisis with a program that purchases mortgages from banks to help them raise the cash for new loans.
That program has so far earned a profit for taxpayers at a cost to the banks, which used it to decrease their funding costs.
CIBC's results yesterday show that it had $29-billion of securitized and sold mortgages at the end of the latest quarter, up from $19.4-billion a year ago. TD had $40.9-billion, up from $24-billion.
At some point, interest rates will begin to rise. That will boost bank profits further just as consumers, still struggling with the fallout of the recession, find the payments on their mortgages and other debts rising.
At the same time, the banks will be sitting on a pile of cash. As CIBC chief executive Gerry McCaughey pointed out on a conference call with analysts Thursday, Canadian banks are sitting on "fairly large excess capital positions." By UBS analyst Peter Rozenberg's estimates, the sector could be holding on to $40-billion in excess capital by the end of fiscal 2012.
These could be the ingredients for a serious round of bank bashing, and a public relations test for the banks.
"This is the double edge sword that the banks always face, they want to generate strong returns for the shareholders but they are politically sensitive entities," said one analyst who asked not to be named.