Canadian banks ended the 2019 fiscal year on a sour note, as Toronto-Dominion Bank and Canadian Imperial Bank of Commerce reported lower profits amid deteriorating credit conditions and signs of economic stress.
Each of Canada’s six largest banks added to provisions set aside to cover loan losses in the quarter, framing the increases as a “normalization” after an extended run of unusually healthy credit. But at some banks, provisions spiked by more than analysts anticipated – by 52 per cent at CIBC, and 33 per cent at TD, for example.
Banks are feeling the same global pressures that have weighed on the Canadian and U.S. economies, and have begun making preparations for a more difficult year in 2020, while tempering investors’ expectations. Bank of Montreal, TD and Royal Bank of Canada all took restructuring charges of varying sizes in the quarter, trimming staff and reducing expenses. And Victor Dodig, CIBC’s chief executive officer, wouldn’t rule out the possibility that his bank might take a similar charge.
Four of Canada’s Big Six banks reported weaker quarterly profit than a year ago – a rare step backward for the country’s banking sector. And TD CEO Bharat Masrani said he expects earnings-per-share growth "to be more moderate again next year.”
“Looking ahead, we expect the operating environment to remain challenging, with continued geopolitical and trade tensions, further normalization of credit conditions and late-cycle concerns keeping interest rates under pressure and financial markets on edge," Mr. Masrani said on a Thursday conference call.
Some of the loan-loss provisions banks added were the result either of adding new loans, or of adjusting economic forecasts as required by accounting rules. But TD’s chief risk officer, Ajai Bambawale, told analysts he’s taken note that personal insolvencies in Canada are at their highest level in a decade. “In my mind, the driver of that is the [high] consumer leverage in Canada.”
At TD, fiscal fourth-quarter profit dipped 4 per cent from a year earlier to $2.86-billion, and earnings per share fell 4 cents to $1.54. Provisions for credit losses rose to $891-million and the bank took $154-million in restructuring charges, spread across each of its divisions.
CIBC’s fourth-quarter profit fell 6 per cent to $1.19-billion year over year. Loan-loss provisions of $402-million were a major drain on profitability, and the bank recorded a goodwill writedown of $135-million after selling a controlling stake in its Caribbean banking subsidiary. Earnings per share were $2.58 in the quarter, down from $2.80 a year earlier.
“We did not deliver what we wanted to deliver to our shareholders, and we are focused on getting the bank back to earnings growth in 2020," Mr. Dodig said.
CIBC’s share price fell 5.2 per cent on the Toronto Stock Exchange on Thursday, while TD’s shares closed 3.5 per cent lower.
Interest rates are one of the major factors that have forced banks to change their posture. Three rate cuts by the U.S. Federal Reserve this year have squeezed lending margins at TD, BMO, CIBC and RBC, all of which have sizable U.S. banking operations. And in Canada, rate increases the banks had built into their forecasts never materialized, as the Bank of Canada adopted a more cautious stance.
“All of the banks have had a bit of a tailwind as rates were rising, and I think there was at one point an expectation of continued tailwind, and that seems to have changed," Hratch Panossian, CIBC’s chief financial officer, said in an interview.
In general, the banks’ domestic retail banking divisions, which generate the largest share of their earnings, churned out modestly higher profits in the fourth quarter. BMO led the way with a 6-per-cent rise year over year, while RBC and National Bank reported 5-per-cent increases. CIBC was an outlier, with quarterly profit falling 10 per cent.
Wealth-management divisions also performed well, though results at RBC and BMO were helped by one-time items. And international banking operations are still an important engine for growth, even though most banks expect lending margins to contract again in the first fiscal quarter of 2020.
Capital markets results, which can be unpredictable, were consistently weak. Fourth-quarter profits fell anywhere from 3 per cent at Bank of Nova Scotia and CIBC to 44 per cent at TD, as a result of lower investment banking fees and higher loan-loss provisions. National Bank bucked the trend with a 7-per-cent increase in financial markets profit, helped by strong trading revenue.
“All in all, I think there’s growth to be had, it’s just not going to be at the robust pace that the banks have seen over the past several years," said Robert Colangelo, a banking analyst at DBRS Ltd. “There’s a lot of uncertainty out there and I think that all kind of parlayed into weaker results in the quarter.”