Rapidly growing profit from Canadian retail and business banking has helped Canada’s two largest banks escape the drag from a slower mortgage market.
Royal Bank of Canada and Toronto-Dominion Bank both comfortably surpassed expectations for earnings in their fiscal second quarters. And in both cases, higher returns from retail and business clients coupled with healthier margins as interest rates begin to rise were key to offsetting rare pockets of weakness.
At TD, profit from Canadian retail banking – which includes wealth management – climbed to $1.8-billion, or 17 per cent higher than a year ago. At the same time, profit from RBC’s Canadian personal and commercial arm rose 7 per cent to $1.5-billion, and wealth management earnings jumped 25 per cent higher, to $537-million.
That was in spite of slower growth in Canadian mortgages, which account for about $240-billion in loans at RBC, and $190-billion at TD. New federal regulations that toughened stress testing on some mortgages are beginning to bite, and the boost some banks received when clients rushed to lock in loans before the new rules took effect in January are starting to recede. The result is that RBC and TD still grew their Canadian residential mortgage books when compared with the same quarter last year – by 6 per cent and 5 per cent, respectively. But both portfolios were effectively flat relative to the previous quarter.
Rod Bolger, RBC’s chief financial officer, sought to dampen concerns about mortgages on Thursday, pointing out that even if the bank’s mortgage balances grow at half the rate he expects over the balance of the year, a single interest rate hike by the Bank of Canada would more than offset any lost revenue.
“Everyone needs to live somewhere, so it’s natural that it’d be front and centre in people’s minds,” he said in an interview, but added that “if one portion of our business does slow down, we have multiple other businesses to pick up the slack.”
Another business line assuming some of the heavy lifting in the second quarter was loans to Canadian businesses, which rose 13 per cent at RBC and 10 per cent for TD, year over year.
And Canada’s banks continue to benefit from very low loan losses, as robust employment and solid economic growth have helped Canadians manage their debts even as household debt continues to rise. RBC’s provisions for credit losses – or the money the banks sets aside to cover soured loans – declined 8 per cent to $274-million, compared with a year earlier. TD’s provisions for loan losses rose from $500-million a year ago to $556-million in the second quarter, as is typical when some borrowers fall behind on paying bills after the holidays.
“We’ve been saying for a number of years that the credit conditions are benign, and credit quality is very good and at cyclical lows,” said Riaz Ahmed, TD’s CFO, in an interview. “We continue to feel that way.”
For the quarter ended April 30, RBC reported profit of $3.1-billion, or $2.06 per share, up 11 per cent from $2.8-billion, or $1.85, a year earlier.
When adjusting earnings per share to exclude certain items, RBC earned $2.10 per share, compared with analysts’ estimates of $2.05, according to Bloomberg LP.
But it was the relative absence of blemishes among TD’s results that attracted investors’ attention. TD’s profit was 17 per cent higher at $2.9-billion, or $1.54 per share, compared with $2.5-billion, or $1.31, in the same quarter last year.
Adjusted for certain items, TD earned $1.62 a share, whereas analysts surveyed by Bloomberg had expected adjusted earnings per share of $1.50.
“We view TD’s results as the best of the Big Six banks so far this earnings season,” said Scott Chan, an analyst at Canaccord Genuity Group Inc., in a research note.
Both banks also continued to enjoy substantial profit growth in their U.S. operations, helped by major corporate tax cuts passed by American law makers last year. TD’s U.S. retail arm produced $979-million in profit, a 16-per-cent increase from the prior year. And City National Bank, which RBC acquired in 2015, contributed US$111-million in quarterly profit − nearly double what it earned in the second quarter of 2017.
RBC and TD have the ability to pursue acquisitions that would bolster their U.S. footprints, thanks to healthy capital reserves. TD finished the quarter with a standout common equity tier 1 ratio of 11.8 per cent, and Mr. Ahmed said the bank is “open to” potential deals.
With a common equity tier 1 ratio of 10.9 per cent, RBC has less breathing room, but chief executive officer Dave McKay said the bank would “absolutely” consider lowering it as far as 10.5 per cent for the right acquisition.“