Toronto-Dominion Bank TD-T and Canadian Imperial Bank of Commerce CM-T joined their peers in ratcheting up reserves for loans that could default, with risk in commercial real estate, credit cards and personal lending products rising as consumers wrestle with high interest rates and inflation.
TD and CIBC posted first-quarter profit Thursday that beat analysts’ estimates, even as customers crimp their spending and wait for interest rates to drop. But analysts have cautioned the CIBC could face higher risk in its U.S. commercial real estate portfolio – which has the highest exposure to the sector of the Big Six banks – as valuations slump in office properties.
“As the economy evolves our allowance levels remain strong and provide us prudent levels of coverage,” said Frank Guse, CIBC’s chief risk officer, during a conference call Thursday. “We expect our office portfolio to have the vast majority of issues well-provisioned, with impairment levels reducing in the quarters ahead.”
As economic growth has slowed, Canada’s largest lenders have been building provisions for credit losses – the funds banks set aside to cover loans that may default. Such provisions are a closely watched indicator of the pressure building on customer finances. Lenders have been ramping up loan loss reserves since late 2022. Bankers largely believe relief is coming, but not until later this year when rates are expected to start dropping.
In the quarter, CIBC set aside $585-million in provisions for credit losses. That was higher than analysts anticipated, and included $93-million against loans that are still being repaid. In the same quarter last year, CIBC set aside $295-million.
Gross impaired loans in real estate have increased every quarter since late 2022, and surged to $1.13-billion from $327-million in the same quarter last year. CIBC said that trend should ease going forward.
TD set aside $1-billion in provisions, which was higher than analysts anticipated, and included $67-million against loans that are still being repaid. In the same quarter last year, TD reserved $690-million.
Provisions for impaired loans increased 30 per cent from the previous quarter – the highest among the large Canadian banks – as losses rise in unsecured consumer lending in both Canada and the U.S., according to CIBC analyst Paul Holden.
On Thursday, CIBC and TD were the final of the Big Six Canadian banks to report earnings for the fiscal first quarter. The rest reported earlier this week, with Bank of Nova Scotia, Royal Bank of Canada and National Bank of Canada beating analyst expectations, while Bank of Montreal missed estimates.
The banks posted better-than-expected profit on stronger performance in Canadian personal banking and commercial banking and capital markets, offsetting weakness in their U.S. divisions.
Adjusted to exclude certain items, TD said it earned $2 a share, topping analyst estimates of $1.89 a share analysts expected. CIBC said it earned $1.81 a share on an adjusted basis, edging out analyst expectations for $1.68 a share.
Revenue in TD’s capital markets unit jumped 32 per cent to a record $1.78-billion on higher activity from the integration of New York-based investment bank Cowen, as well as a boost in equity commissions, trading and underwriting fees.
CIBC’s Canadian personal and small business banking earned $650-million, up 10 per cent from a year earlier, as the business added more than 600,000 new customers in the past year.
Competition in the U.S. banking market has intensified since the regional banking crisis in March put pressure on the need to build deposit bases and climbing interest rates prompted more customers to stash their money in high-paying savings products.
Profit in TD’s U.S. business fell 43 per cent to $670-million on lower net interest margins – the difference between the amount banks earn on loans and pay on deposits. CIBC’s U.S. division posted a loss of $9-million, as lower deposit balances, static loan growth, higher provisions and expenses weighed on earnings.
“We expect the credit environment and the credit provisions to moderate as we get to the back half of this year,” said Hratch Panossian, CIBC’s chief financial officer, in an interview.
Both businesses were affected by a charge stemming from a special assessment by the U.S. Federal Deposit Insurance Corporation.
TD is also trimming its expenses by reducing its work force and real-estate premises. The lender booked $213-million in after-tax restructuring charges, adding to a similar charge last quarter.
The bank expects savings of about $400-million pre-tax in 2024, and $600-million in 2025, which it plans to invest in key products, digital technology and advisers, CFO Kelvin Tran said in an interview.
“An important investment for us in 2024 would be our risk and control infrastructure,” he said.
Laurentian Bank of Canada, the country’s ninth-largest lender, also posted first-quarter results on Thursday, though it missed analysts’ estimates. Its profit fell to 91 cents a share on an adjusted basis, down from $1.15 a year prior. Analysts had expected a profit of 95 cents a share.
In the fall, Laurentian ousted its chief executive officer after a multi-day system outage and a sales process in which the bank failed to attract a buyer. New CEO Éric Provost plans to launch a new plan in the spring aimed at improving its performance.
Expenses jumped 8 per cent from the same quarter last year, as the bank upgrades its technology and operations, stemming from issues from the system outage.
In the fourth quarter, Laurentian spent $5-million waiving customer fees and resolving the system issues. This quarter, it allocated an additional $2-million to the initiative.
Deposits dropped as it shed account balances that are more expensive for the bank to fund.
“It should be somewhat expected that the bank is currently spending to adjust its business, so lower-than-expected results because of high expenses is not overly concerning in our view,” said Darko Mihelic, an RBC analyst, in a note.
Stefanie Marotta