Canada’s largest banks are finally seeing the pace of lending pick up, reviving a core engine for earnings growth after a prolonged slump in demand for loans that was caused by disruption from the COVID-19 pandemic.
Toronto-Dominion TD-T was the last of the Big Six banks to report earnings for the fiscal first quarter, posting a 14-per-cent bump in profit on Thursday, larger than analysts expected. A 6-per-cent rise in revenue from retail banking underpinned the results, as the bank’s Canadian loan book expanded by 9 per cent.
All six of Canada’s largest banks comfortably beat analysts’ expectations for earnings in the quarter that ended Jan. 31, continuing a streak of large profits dating back to last year. Some of the factors that have repeatedly boosted banks’ results through COVID-19 are still present, including soaring trading revenues in volatile markets, and the gradual release of reserves against loan losses that banks built up early in the pandemic.
Now, loan growth has returned to the forefront, promising a more consistent and predictable source of new earnings. Total loans to personal and business clients in Canada were up 12 per cent at Scotiabank and Canadian Imperial Bank of Commerce, for example, and income from fees charged on cards and mutual funds also surged.
Several bank executives have said the easing of public-health restrictions is a key reason clients are spending and borrowing more, even as the Omicron wave brought new infections and upended re-opening and return-to-office plans. As many companies reset those plans for the spring, banks see further opportunities for loan growth.
“In terms of activity … we think there’s still room to grow,” Kelvin Tran, TD’s chief financial officer, said in an interview. “If you look at [the first fiscal quarter], there was still some restrictions on travel and stuff like that. We can see this pent-up demand and, as restrictions ease up, we’re optimistic.”
That positive outlook is clouded by Russia’s invasion of Ukraine and the potential fallout as the conflict escalates and Western countries respond with sanctions designed to isolate the Russian economy. Mr. Tran said it is too soon to gauge the war’s impact on the world economy or on consumer confidence. But central bankers have said they are watching closely, and “whether that impacts their pace of rate hikes is yet to be seen,” he said.
In the first fiscal quarter, TD earned $3.73-billion, or $2.02 a share, compared with $3.28-billion, or $1.77 a share, in the same quarter last year. On an adjusted basis, TD said it earned $2.08 a share, beating analysts’ consensus estimate of $2.03 a share, according to Refinitiv.
Several of TD’s rival banks posted even larger increases in retail banking profits, including 34 per cent at Bank of Montreal and 32 per cent at Bank of Nova Scotia, compared with a year earlier.
In recent quarters, large banks’ loan books expanded mainly because of huge demand for mortgages amid hot housing markets. Other loan categories lagged, and the Omicron variant threatened to be a further setback as some provinces temporarily tightened measures to curb its spread. But in the first quarter, loans increased across a broader range of categories.
Mortgages were up sharply again, but business lending was almost as strong. Commercial loans to Canadian companies increased 21 per cent at National Bank of Canada, 19 per cent at CIBC and 10 per cent at BMO.
Some personal-lending categories also showed signs of life as consumer spending increased. Credit card balances increased 3.5 per cent at Royal Bank of Canada, compared with a year earlier, although high levels of household savings boosted by government stimulus programs through the pandemic continue to weigh on borrowing.
The large banks still have continuing challenges. Expenses increased as performance pay surged owing to strong results in 2021, and inflation started to affect everything from wages to procurement of supplies. And while loan balances are rising, low interest rates kept profit margins from lending lower or flat at most banks.
The Bank of Canada raised its benchmark interest rate on Wednesday, and TD could reap large gains because its retail-focused business is highly sensitive to changes. The bank estimates that a single increase to benchmark rates of 0.25 percentage points in Canada and the United States would add $394-million to revenue over one year.
Economists anticipate several rate increases in Canada and the U.S. this year as central banks aim to control high levels of inflation that have proved persistent. But TD’s Mr. Tran said he does not expect a rapid move to higher borrowing costs to dampen the recent resurgence in customer demand for loans.
“People are expecting rates to rise for some time now,” he said. “Normalization of rates from very low levels, I think it’s a good thing.”
Early this week, TD made a move to speed up its expansion in the United States, announcing a US$13.4-billion deal to buy First Horizon Corp., a regional bank based in Memphis, Tenn., that will extend TD’s reach in the U.S. southeast. It was the second largest acquisition by a Canadian bank, after BMO’s deal to acquire California-based Bank of the West for $20.9-billion two months earlier.
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