Canadian bank profits have continued to rise this year despite lingering concerns about high debt levels among Canadians.Tibor Kolley/The Globe and Mail
Many of Canada's big banks have been slashing costs this year, but the impact has been largely unknown – until now.
As the banks begin reporting fiscal fourth-quarter results on Tuesday, observers will be looking for any signs that the slow Canadian economy is affecting loan growth and the banks' other financial activities. A key focus will be on the extent to which some banks have been cutting jobs and taking restructuring charges.
"The increased emphasis on expense control that the Canadian banks have communicated over the past year will reach a crescendo in the upcoming fourth-quarter results," Sumit Malhotra, an analyst at Scotia Capital, said in a recent research note.
Financially, the banks have enjoyed a good year. Profits have continued to rise despite lingering concerns about high debt levels among Canadians and fears that some struggling energy producers might not meet their loan obligations with the price of oil mired near multiyear lows.
However, conditions are challenging nonetheless. Revenues are rising at a slower pace, as consumers show less enthusiasm for tapping their banks for loans and mortgages. At the same time, the banks are also dealing with a profound shift as consumers move from traditional branch banking toward online and mobile banking, while upstart technology firms are keen to wrest market share from established players, forcing the banks to adapt.
As a result, a number of banks have been cutting expenses in branches and boosting their investments in technology, likely driving the sector's restructuring costs over the past year above $1-billion – a notable spike compared with the past decade.
Toronto-Dominion Bank is a key name to watch after it shook up its senior ranks and hired an outside consultancy to help it identify cuts that could affect hundreds of employees. Although the lender has not attached any figures to the dramatic changes in recent months, its fourth-quarter results should provide some indication.
"Over the past two years, TD has seen a big expense jump in the fourth quarter, and we wonder whether recent restructuring efforts will moderate that trend this time around," Meny Grauman, an analyst at Cormark Securities, said in a note.
He expects the bank will take a restructuring charge similar to its after-tax charge of $228-million in the second quarter, putting TD in the lead among its peers in terms of charges this year.
Canadian Imperial Bank of Commerce has been clearer about its changes during the fiscal fourth quarter, after announcing in October that it will take a restructuring charge of $175-million to $200-million, as part of a wider plan to drive greater efficiencies over the next few years.
Still, the charges bear watching. Robert Sedran, an analyst at CIBC World Markets, expects that CIBC's expenses will continue to rise at a faster pace than revenue in retail and business banking until the bank's various efficiencies kick in.
"This bank has been showing well both on an absolute basis and relative to peers," Mr. Sedran said in a note. "We will be watching to see if this progress has continued."
Apart from numbers related to job cuts, observers will also be paying close attention to what executives say about operating conditions, looking for hints about whether the cost-cutting will extend into 2016.
"We continue to view restructuring as an important tool to manage costs and believe the Canadian banks could embark on additional restructuring endeavours if the outlook for revenue growth becomes more challenging," Darko Mihelic, an analyst at RBC Dominion Securities, said in a note.
Bank of Nova Scotia kicks off the reporting season Tuesday morning, followed by Bank of Montreal. Royal Bank of Canada and National Bank of Canada report their respective results on Wednesday. CIBC and TD wrap up the season on Thursday.
David Berman