Royal Bank of Canada and Toronto-Dominion Bank reported solid earnings for the second quarter and predicted more growth in the near future, helping to dial down concerns that Canadian lenders are on the cusp of serious challenges.
Canada’s two largest banks posted quarterly profits that were at or near record levels, earning a combined $6.4-billion. They also re-affirmed their expectations of high-single-digit profit growth in 2019, in the case of TD, and a strong return on equity, in the case of RBC.
“Our medium-term target of hitting 7- to 10-per-cent earnings growth continues to be applicable [for TD]," chief executive Bharat Masrani said on a conference call. He also re-iterated comments made last quarter that the target for fiscal 2019 is now at the bottom end of this range after an unexpected loss from wholesale banking at the start of the year.
The results should give those following the sector some confidence after Canadian Imperial Bank of Commerce slashed its profit outlook for the full year on Wednesday and said that it now expects little-to-no earnings growth in fiscal 2019.
However, shares of TD and RBC traded in opposite directions on Thursday. RBC’s shares slipped 2.4 per cent to $102.64, while TD’s stock gained 2.2 per cent to $75.47.
The divergence partly stems from TD’s superior earnings relative to expectations this quarter, but it is also a function of TD’s recent trading history. The bank’s stock had struggled of late, after reporting a weaker first-quarter profit that included a rare loss in its wholesale banking arm. RBC’s stock, meanwhile, had performed well. TD’s results gave investors confidence that first-quarter results were more likely a blip, rather than the new norm.
“After reporting a weak [first quarter], the onus was on TD to deliver a turnaround quarter, which it did,” National Bank Financial analyst Gabriel Dechaine wrote in note to clients.
As for RBC, the bank beat estimates on the back of some one-time items, such as a lower tax rate and a sudden surge in revenues from fixed-income, currency and commodity trading, providing less assurance that it can do so again later this year.
Despite the weakness in its stock Thursday, RBC’s shares are still up 9.8 per cent year-to-date and have regained all of the ground lost during the broad market correction in the fall of 2018.
“Although segmented earnings were mixed, we view RBC’s underlying fundamentals as strong and deserving of a premium valuation multiple to peers,” Canaccord Genuity Group Inc. analyst Scott Chan wrote in a note to clients.
Both TD and RBC are touting their ability to cool expense growth in the second half of the year and into 2020. Both banks have spent heavily over the last few years to re-tool for the digital economy by spending on initiatives such as mobile apps.
“We’ve gotten ahead of the curve on a number of large programs,” RBC CEO David McKay said on a conference call. “We tied a lot of the [expense] increase to the revenue tailwinds from interest-rate increases.”
Looking forward, RBC expects to slow its expense growth to the low-single-digits because much of the heavy lifting is over. TD is in a similar boat.
During the second quarter, TD made a record $3.2-billion, 8.8-per-cent more than the same period in 2018. While the bank reported more muted growth of 0.9 per cent year-over-year in its Canadian banking division, which delivers the bulk of its earnings, its U.S. retail bank saw 13.6-per-cent profit growth in U.S. dollars, to US$753-million.
In Canadian retail banking, expenses grew 11 per cent, while revenue climbed 8.1 per cent, which speaks to the heavy spending TD has pursued. Amid a cooling housing market, residential mortgage lending grew, but by only 1.8 per cent over the second quarter of 2018.
RBC, meanwhile, made $3.2-billion, its second-highest profit on record and 5.6 -per-cent more than during the same period in 2018. Profit from Canadian banking climbed 2.4 per cent in the second quarter to $1.5-billion, marking slower growth for the division that generates roughly 45 per cent of total profit. Residential mortgage lending grew at a healthy 5.2 per cent over the second quarter of 2018.
But net income from wealth management jumped 8.9 per cent year-over-year to $585-million and earnings from capital markets popped 16.7 per cent to $776-million, buoyed by interest rate and credit trading. Over all, total expense growth of 7.9 per cent was a drag on the bank’s earnings.