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The Toronto-Dominion (TD) bank logo is seen outside of a branch in Ottawa, Ontario, Canada in this file photo from Feb. 14, 2019.

Chris Wattie/Reuters

Tighter lending margins and falling trading commissions squeezed first-quarter profits at Toronto-Dominion Bank, a rare stumble capping off a string of good results by Canadian banks.

TD was the last of the country’s Big Six banks to report results for the quarter ended Jan. 31, and fell short in an area that is typically its strength – retail banking in Canada and the United States. By contrast, National Bank of Canada reported an 11-per-cent bump in first-quarter profit on Thursday, in spite of slower growth in its own retail division.

A banner quarter for capital markets helped keep banks’ profits buoyant. Trading and investment banking revenues surged across the board, bouncing back from a weak first quarter in 2019. Those gains helped mask occasional pockets of weakness: TD, Bank of Nova Scotia and Bank of Montreal all reported lower profits from banking operations outside Canada, as well as higher provisions for credit losses – the funds banks set aside to cover bad loans.

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Yet as new economic risks emerge, including the global spread of COVID-19 as well as rail blockades set up in Canada by protesters opposing the Coastal GasLink natural gas pipeline, bank executives sounded a note of caution as they look ahead.

Executives at each of the banks said it is too soon to tell whether the virus will meaningfully disrupt consumer spending, business activity or supply chains. BMO has the most direct exposure to the outbreak, as the only Canadian bank with a subsidiary in mainland China. But that Chinese business is not large enough to affect the overall bank, and the main risk to BMO – and to its Canadian peers – is still core banking activities.

“What we’re watching more particularly is for, in North America, impacts related to supply chains. They haven’t been significant to date," Tom Flynn, BMO’s chief financial officer, said in an interview on Tuesday. “The longer the virus is impacting things, the greater the risk of that."

Canada’s banks are already grappling with the effects of flat or falling interest rates. At TD, U.S. retail profits increased by only 2 per cent year over year. Rate cuts by the U.S. Federal Reserve and a new accounting standard known as IFRS 16 dampened earnings, as U.S. loan margins fell 35 basis points (100 basis points equal one percentage point).

A steep drop in the profit TD reaps as a large shareholder in TD Ameritrade Holding Corp. also put a large dent in the bank’s earnings. Under pressure from rivals, TD Ameritrade scrapped trading commissions on U.S. stocks, exchange-traded funds and options last October, and then agreed to be acquired by rival Charles Schwab Corp. in late November.

In the fiscal first quarter, TD received $201-million in profit from its investment in TD Ameritrade, down 35 per cent from a year ago. But that was “very much within our expectations," Riaz Ahmed, TD’s chief financial officer, said in an interview.

“We expect full-year [earnings per share] growth to be moderate again this year,” Bharat Masrani, TD’s chief executive officer, said on a Thursday conference call. But as Fed rate cuts continue to put pressure on margins, and as the bank ramps up spending in its retail divisions, “the path there may be bumpy.”

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TD reported profit of nearly $3-billion, or $1.61 per share, compared with $2.41-billion, or $1.27 a share, a year ago.

Adjusted to exclude certain items, including a one-time $607-million charge that TD took a year ago in connection with its new loyalty agreement with Air Canada, TD said profit rose 4 per cent to $3.1-billion, or $1.66 per share. Analysts expected adjusted earnings per share of $1.69, according to Refinitiv.

The banks’ retail results were mixed. Increased commercial lending helped boost profit from BMO’s personal and commercial arm by 8 per cent, and rapid growth in mortgages pushed Royal Bank of Canada’s retail profits up 9 per cent. But retail profits at TD and National Bank were tepid, rising 4 per cent year over year, while at Canadian Imperial Bank of Commerce, adjusted earnings from personal and small business banking fell 2 per cent as expenses increased faster than revenue.

National Bank reported first-quarter profit of $610-million, or $1.67 per share, compared with $552-million, or $1.50 per share, in the same quarter last year.

Adjusted for one-time items, including a $13-million charge related to its stake in the insolvent Maple Bank GmbH, National Bank said it earned $1.70 per share, ahead of analysts’ consensus estimate of $1.66 per share.

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