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All six banks posted year-over-year declines in profit from capital markets as they tried to cope with turbulent markets through much of November and December.Tijana Martin/The Canadian Press

Canada’s major banks are hoping to shrug off a choppy first quarter after volatile financial markets hurt profitability to start fiscal 2019.

Toronto-Dominion Bank and Canadian Imperial Bank of Commerce wrapped up the quarterly earnings season for major lenders on Thursday with dividend increases, but also posted weaker-than-expected profits. Like their peers, both banks suffered from sluggish results in capital markets and wealth management during the November-to-January quarter and had to build up provisions to cover possible loan losses, despite better results from retail banking.

Bank executives are largely expecting conditions to be smoother over the rest of fiscal 2019, as financial markets have settled down and client activity began to pick up through January and February. The S&P/TSX Composite index rose 11.7 per cent in the first two months of the year, its best start since 1987. Key economic indicators such as unemployment are also still strong.

But there’s a more muted tone among bankers about the prospects for the year, as several banks updated their forecasting for loan losses to account for greater economic uncertainty because of shifting expectations for factors such as oil prices, equity market returns and housing prices.

And that, in turn, has caused the provisions banks set aside to cover bad loans to swell, further sapping profits – though bank executives expect provisions will vary from quarter to quarter.

“We went through a difficult period here in the first quarter, and markets don’t always exhibit this level of volatility,” Riaz Ahmed, chief financial officer at TD, said in an interview. But he echoed comments made by other bank executives this week, emphasizing that markets are “showing signs of normalization again."

Despite poor performance from capital markets and wealth management in the quarter, Jim Shanahan, an analyst at Edward Jones & Co., is predicting better revenues in those business lines in the next quarter, “and then continuous improvement throughout the year.”

All six banks posted year-over-year declines in profit from capital markets as they tried to cope with turbulent markets through much of November and December. But nowhere was the decline more pronounced than at TD, which posted a rare net loss of $17-million in its wholesale banking arm, compared with a $278-million profit in the same quarter last year. It was the division’s first quarterly loss since 2008.

“The volatility had two main effects. Issuing clients remained on the sidelines, and then trading margins compressed quite significantly for us," Mr. Ahmed said. “We had no significant losses or writedowns on any particular day. This was just a result of steady downward pressure on trading margins.”

The capital markets division at CIBC was also knocked off stride, with profit falling 38 per cent year-over-year to $201-million as a result of lower revenue from trading and underwriting.

Provisions for credit losses played a key role in driving weaker quarterly results. Both TD and CIBC have exposure to the bankruptcy of PG&E Corp., the California utility giant, and each bank also set aside more funds to cover potential losses on loans that are still performing, based on changing assumptions in their models.

TD’s provisions were $850-million, up from $693-million a year ago, while CIBC set aside $338-million – a 121-per-cent increase from a year earlier that also included writeoffs on some commercial loans. Even so, loan losses are coming off historically low levels, and both banks said credit quality is still strong.

“There was credit deterioration evident in most of the banks’ results,” Mr. Shanahan said. But he considers the utilities provisions as one-off headaches. Losses on consumer and business credit are still modest. “At worst, credit is right now a modest earnings risk," he said.

Both banks’ first-quarter results were affected by one-time payments made to Air Canada to secure partnerships with its new loyalty program, which will allow Aeroplan members to transfer existing reward miles. As the primary credit card issuer in the deal, TD recorded a $607-million charge, while CIBC paid $227-million. TD also took a $31-million charge relating to its acquisition of Regina-based money manager Greystone Managed Investments Inc.

For the quarter ending Jan. 31, TD reported a profit of $2.4-billion or $1.27 a share, up 2 per cent from $2.35-billion or $1.24 a year ago.

Adjusted to exclude the Air Canada and Greystone charges as well as other items, TD said it earned $1.57 a share, well shy of analysts’ expectation of $1.72, according to Thomson Reuters I/B/E/S.

First-quarter profit at CIBC was $1.18-billion or $2.60 a share, down 11 per cent from $1.33-billion or $2.95 last year.

Excluding the Air Canada charge and other items, CIBC earned $3.01 a share, whereas analysts expected $3.08.

Both banks raised their quarterly dividends, TD by 7 cents to 74 cents a share, while CIBC boosted its payout by 4 cents to $1.40.

Bank stocks responded accordingly to the inconsistent results. Five of the six largest lenders saw declines in their share prices on the Toronto Stock Exchange on the day they released results, with only Bank of Montreal bucking the trend. TD’s shares fell 2.4 per cent to $75.46, while CIBC’s shares traded 2.7 per cent lower at $111.63.