Skip to main content

Toronto-Dominion Bank and Canadian Imperial Bank of Commerce can thank a hot U.S. economy for higher profits. But the banks' sizable American operations aren’t expected to deliver as much growth in 2019 because of rising competition.

TD and CIBC, which both released year-end earnings on Thursday, have a lot of exposure to the United States following large acquisitions. Lately, profit growth from those divisions has been encouraging – particularly for TD. The bank, which endured years of anemic returns in its U.S personal and commercial bank after the global financial crisis, saw its annual profit from U.S. retail banking jump 26 per cent to $4.2-billion.

Oddly enough, the worry now is that the U.S. economy has been doing too well. The recovery is nearly a decade old and inflation and wages are ticking higher, prompting the Federal Reserve to hike interest rates eight times in the past two years.

Story continues below advertisement

Because business is booming, the U.S. banking market has become extremely competitive. “Competition has increased,” DBRS Ltd. analyst Robert Colangelo said. "Even though the U.S. is a very large market, it is limited in how much market share the banks can take – especially on the commercial side.”

Executives from both banks echoed this sentiment in conference calls Thursday. “It certainly has been competitive" when luring commercial deposits, said Greg Braca, group head of U.S. banking at TD.

“We’ve reached a threshold,” said Larry Richman, head of the U.S. region for CIBC. “As rates are rising, clients that have excess cash are wanting to get paid for it.”

Retail and commercial banks make money by attracting low-cost deposits and lending this money out at higher rates. Lately, U.S. banks have been able to charge more per loan, because interest rates have been rising.

But the market for attracting deposits is also getting more aggressive, which will force banks to pay up for deposits, slowing their loan margin growth.

A few more clouds are also forming over the U.S. economy. In a report released Thursday, credit rating agency Standard & Poor’s noted “the risk of recession for the U.S. has risen and growth will likely slow even if the U.S.-China tariff dispute doesn’t escalate into a trade war.”

S&P said the odds of a downturn over the next 12 months are 15 per cent to 20 per cent, compared with 10 per cent to 15 per cent in its previous forecast.

Story continues below advertisement

Despite shifts in the United States, total earnings at both banks are still expected to be higher next year. TD is particularly optimistic, with chief executive Bharat Masrani predicting total earnings growth of 7 per cent to 10 per cent in fiscal 2019.

CIBC is slightly less bullish, expecting 5-per-cent to 10-per-cent expansion. However, the bank remains optimistic about the quality of its loan book. “While there continue to be potential headwinds, as it feels like we are entering the later part of the economic cycle, we remain confident in our strong underwriting practices and the quality of our credit portfolios,” chief risk officer Laura Dottori-Attanasio said in a conference call.

Investors had divergent reactions to the profits announced Thursday. TD’s shares were relatively flat by the end of the trading day, closing at $73.48, while CIBC’s shares fell 3 per cent to $112.46.

For the full fiscal year, which ended Oct. 31, TD reported net income of $11.3-billion, nearly 8 per cent higher than fiscal 2017, while CIBC’s annual profit climbed to $5.2-billion, up 12 per cent from the prior year.

Earlier this week, TD and CIBC announced the details of their participation in Air Canada’s acquisition of the Aeroplan loyalty rewards program. TD is betting heavily on Aeroplan, committing to $1-billion worth of upfront payments and future expenses as the lead financial partner. Its contract with Air Canada will start in 2020 and last until 2030.

CIBC will be a secondary partner in the new arrangement, and has agreed to pay $292-million in total to participate.

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Comments

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • All comments will be reviewed by one or more moderators before being posted to the site. This should only take a few moments.
  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed. Commenters who repeatedly violate community guidelines may be suspended, causing them to temporarily lose their ability to engage with comments.

Read our community guidelines here

Discussion loading ...

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.
Cannabis pro newsletter