Rebounding consumer spending and business investment are boosting profits for three of Canada’s largest banks as customers travel and dine out more often, and bankers expect that growth to continue – perhaps at a more moderate pace – even amid mounting fears of an economic downturn.
Royal Bank of Canada RY-T and Toronto-Dominion Bank TD-T both reported profits for the fiscal second quarter ended April 30 that beat estimates, while Canadian Imperial Bank of Commerce’s CM-T earnings fell short of expectations as its costs swelled. All three banks saw revenue and loan balances in their core Canadian retail and business banking operations post strong gains compared with a year earlier.
As consumers open their wallets, the surge is pushing businesses to borrow and invest to meet that demand, which has helped drive up fees and interest income collected by banks.
But a key question confronting banks Thursday was whether the trend will continue in the face of high inflation, rapidly rising interest rates and growing gloom about the prospects for an economic downturn. Investors and analysts are on edge about whether demand for loans could wane and defaults on existing loans might rise if economies swing toward a recession.
The banks say their clients are still upbeat and the fundamentals that underpin retail banking look strong enough to withstand some economic headwinds.
“It feels like there’s certainly some more caution out there,” said Hratch Panossian, CIBC’s chief financial officer, in an interview. “But at this point in time, on the ground with our clients, there’s still a relatively high level of confidence and relatively high level of activity as the economy has opened up, the services sectors are coming back.”
On Wednesday, Bank of Nova Scotia and Bank of Montreal both reported higher second-quarter profits and rising loan balances, and executives from both banks offered optimistic outlooks for the financial sector.
There are two key factors bolstering banks’ confidence: a tight labour market that has Canada’s unemployment rate at its lowest level in decades, and the financial buffer many customers built during the COVID-19 pandemic in the form of higher savings and lower debt.
As public health restrictions lifted, spending came roaring back. Credit and debit transactions by RBC customers were 30-per-cent higher in April than before the pandemic, and that momentum carried into May, said chief executive officer Dave McKay. TD’s credit card retail sales were up 22 per cent year over year, according to Mr. Tran. And at CIBC, purchase volumes on cards were up 30 per cent from a year earlier, excluding the bank’s newly acquired portfolio of Costco-branded credit cards.
“We have seen, I’m going to say, full recovery in the categories that are travel, hotel, entertainment,” said Laura Dottori-Attanasio, CIBC’s head of personal and small business banking, on a Thursday conference call.
That spending could come under pressure as inflation and rising interest rates push up prices and borrowing costs for customers. “It’s definitely going to eat into their discretionary income ... and consumers then need to make choices,” said Kelvin Tran, TD’s chief financial officer, in an interview.
“But I think for the consumer, what is a very important factor is the unemployment rate,” Mr. Tran said. “If people are gainfully employed and we continue to see the [labour] market continues to be very tight, that increases confidence.”
Many customers also have more financial breathing room in the form of lower debts from personal loans, as well as higher savings. At CIBC, use rates on lines of credit are about 20-per-cent lower than in 2019, and the rate of revolving credit card balances is down between 7 and 10 per cent.
“We’re feeling really good about the health of the consumer,” Ms. Dottori-Attanasio said. “We’re seeing very prudent behaviour when it comes to how people are managing their debt and how they’re making payments on their credit cards.”
Though bankers are confident their customers are resilient, they are still struggling to predict how the economy will react to rapidly rising interest rates. Central bankers “have to hit demand really hard” to tamp down inflation, Mr. McKay said. “Do we land it with a slight recession? I think our message today is it could go either way, it’s 50-50. Having said that, ... there are good shock absorbers to absorb that uncertainty.”
In the fiscal second quarter, RBC earned $4.25-billion, or $2.96 a share, compared with $4-billion, or $2.76 a share, a year earlier. On an adjusted basis, RBC said it earned $2.99 a share, beating an estimate of $2.71, according to Refinitiv.
TD reported net income of $3.8-billion, or $2.07 a share, helped by a one-time boost of $224-million stemming from a lawsuit settlement. TD’s adjusted earnings amounted to $2.02 a share, down slightly from the year prior but ahead of the consensus analysts’ prediction of $1.93 a share.
And CIBC earned $1.52-billion, or $1.62 a share, compared with $1.65-billion, or $3.55 a share, in the same quarter last year – before the bank completed a 2-for-1 share split. CIBC said it earned $1.77 a share on an adjusted basis, just below analyst estimates of $1.80 a share.
RBC raised its quarterly dividend by 8 cents a share to $1.28, and CIBC increased its dividend by 2.5 cents a share to 83 cents.
RBC and TD continued to unwind large loan loss reserves they stockpiled to guard against the possibility COVID-19 could cause losses to swell. RBC recovered $342-million in provisions for credit losses in the quarter. TD earmarked just $27-million in total new provisions, while releasing some other reserves as loans are being paid back.
Executives at both banks said their expectations for credit are more optimistic now that pandemic-related risks have receded. But each bank also plugged more pessimistic assumptions into models they use to predict future losses, acknowledging the odds of some sort of economic downturn are rising.
“Omicron didn’t have a big impact on [provisions] so that was a favourable factor in this quarter,” Mr. Tran said. “And then you added something that is less favourable, which is this uncertainty, this outlook.”
With a report from Tim Kiladze
Editor’s note: Hratch Panossian's title has been corrected in the online version of this story.
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