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At TD, earnings from Canadian retail banking rose 7 per cent in the third quarter, to $1.85-billion. But profit from its extensive U.S. footprint rose 27 per cent, to $1.14-billion.Nathan Denette/The Canadian Press

Toronto-Dominion Bank reported a 12-per-cent bump in third-quarter profit to cap off another smooth earnings season for Canada’s big banks, as higher international profits and wider lending margins more than offset any drag from a slower mortgage market.

With interest rates rising and low unemployment across North America, Canadian lenders made gains. Domestic profits rose by a respectable 5 per cent to 8 per cent at most banks, while international operations – mostly in the United States and Latin America – produced outsized returns, helping total earnings outpace expectations.

At TD, earnings from Canadian retail banking rose 7 per cent in the third quarter, to $1.85-billion. But profit from its extensive U.S. footprint rose 27 per cent, to $1.14-billion, helped in part by U.S. tax cuts, which provided a $61-million lift to earnings.

Longstanding concerns about hot-and-cold Canadian housing markets, trade upheavals and high consumer debt persist, but none of those risks appear to have held banks back in any meaningful way. Five of the country’s Big Six banks surpassed expectations for earnings per share in the third quarter, with only Bank of Nova Scotia falling short by one cent as it works to close and digest six deals worth $7-billion announced within a nine-month span. Total profits for the country’s six biggest banks reached more than $11.6-billion in the three months that ended July 31.

For some time, bank executives have acknowledged that after a decade of economic expansion, the current business cycle may be entering its later stages, but the banks’ recent results show no signs that a downturn is imminent.

Expected loan losses inched higher at some Canadian banks in the third quarter, including Royal Bank of Canada, which earmarked an extra $90-million to cover potential losses on loans that are currently performing, to meet new accounting standards. TD set aside a total of $561-million to cover loans that may go sour, up 11 per cent from unusually low levels a year ago. Yet, credit remained healthy across the sector in the third quarter, even as a steady drum beat of rate hikes by the Bank of Canada threatens to add to the burden on debt-laden consumers.

“Credit is a really strong part of the story here. The theme with Canadian banks is that credit is ultimately going to be a headwind, but we don't see any signs of that yet,” said Jim Shanahan, an analyst at Edward Jones & Co.

As expected, the Canadian mortgage market has cooled as a series of measures by governments and regulators tighten the conditions to qualify for home loans. That has eaten into the rate of growth in banks’ mortgage portfolios: CIBC increased residential mortgage balances by only 3 per cent, year over year, and Bank of Montreal lagged the group with 1-per-cent mortgage growth. But as customers begin to adjust to the new measures, declining growth in borrowing shows signs of levelling off, and banks have compensated by taking on more commercial loans and by controlling costs.

“In Canada, over the last year and a half, we’ve seen much better economic growth than was anticipated,” said Riaz Ahmed, TD’s chief financial officer, in an interview. “We’re also seeing consumer resilience, and interest rates are rising steadily but slowly, which gives everybody time to adapt.”

Several bank executives also expressed renewed optimism about trade this week as a revamped North American free-trade agreement looks to be within reach, after a year of strained negotiations. Should Canada reach a new deal with the United States and Mexico, it would remove a major source of uncertainty that has weighed on confidence among businesses that borrow from banks.

“We currently have tailwinds,” Mr. Ahmed said. “Geopolitical trends are always important as we look at our cross-border as well as our global wholesale businesses, and I think we’re right now feeling that the environment is quite good.”

For the third quarter, TD reported profit of $3.1-billion, or $1.65 a share, compared with $2.8-billion, or $1.46 a share, in the same quarter last year.

Adjusted to account for special items, TD said it earned $1.66 a share, three cents better than analysts had expected, according to data from Thomson Reuters I/B/E/S.

“In our view, TD has followed a very strong [second quarter] with another relatively solid third quarter,” said Steve Theriault, an analyst at Eight Capital Corp., in a research note.

It wasn’t all smooth sailing for TD, however. The bank’s capital markets arm suffered a steep decline in profit, which fell 24 per cent to $223-million – even as rival investment banks appear to be turning a corner. TD’s weak performance stemmed mainly from losses on trading deposits held on its balance sheet. “Because we hold these deposits to maturity, they will be volatile, they’ll go up and down, but in the end the ups and downs should net out,” Mr. Ahmed said.