No matter how many caution flags are waved, Canadian banks continue to pile up profits.
Amid signs of a cooling Canadian economy and slower personal borrowing, the country's largest lenders are reporting stellar results, reviving memories of a recent earnings season when four of the Big Six banks reported record profits.
Canadian Imperial Bank of Commerce and Toronto-Dominion Bank extended the latest bonanza on Thursday, with CIBC reporting solid growth in its core earnings for the first quarter of its fiscal year, and TD announcing a quarterly profit of more than $2-billion for the first time.
Leading the sector's charge is continued strength from Canadian personal and commercial banking. Weaker growth expectations for the Canadian economy have helped keep yields low, allowing mortgages and business loans to stay extremely affordable.
Wealth management is also a hot sector, with most banks benefiting from the rise in the values of their assets under management because of stronger markets.
Banks are typically paid a percentage of these assets, so the pricier they become, the more the financial institutions make.
The banking environment looks so encouraging that even TD, which has been rather pessimistic about the outlook, changed its tune to offer rosier expectations. "The year is off to a good start and we have great momentum in our core businesses," said chief executive officer Ed Clark.
Three of the Big Six banks – National Bank of Canada, CIBC and TD – have reported record profits this quarter. Investors seem unmoved, though. The S&P/TSX banks subindex has barely ticked higher since the banks started to report, climbing just 0.4 per cent.
Bank of Nova Scotia is the last of the Big Six banks to report next Tuesday.
TD made $2.04-billion or $1.07 a share during the first three months of the fiscal year, backed by a 5-per-cent gain from its Canadian banking arm. Unlike the country's other big banks, TD folds the results from its wealth management operations into Canadian banking, so the division's profit jumped on better loan volumes as well as higher fees from assets under management.
However, TD Insurance, which also reports as part of this group, continues to be a drag on the bottom line. Yet again, the unit saw a spike in severe weather accident claims. Wholesale banking was a bright spot in the first quarter, driven by a jump in trading revenues, while U.S. banking posted solid results, but lacked momentum relative to the previous two quarters.
Surprising investors, TD raised its quarterly dividend by a healthy 4 cents to 47 cents a share. After such a large increase, the bank said this may be its last payout increase for fiscal 2014.
The latest set of earnings should bolster investors' confidence after the bank's mixed performance in 2013. Although TD reported record profits in several units last year, total earnings per share climbed just 0.4 per cent.
CIBC's profit jumped significantly in the first quarter, boosted by solid core earnings as well as one-time items. The bank made $1.18-billion or $2.88 a share. After accounting for sizable one-time items, including a gain on the sale of half of its Aeroplan credit card portfolio, the bank made $951-million or $2.31 a share.
In retail and business banking, core earnings jumped 11 per cent to $643-million, reflecting both solid loan volumes as well as lower loan losses. In wealth management, profit popped 28 per cent over the prior year, climbing to $114-million.
On the back of the strong earnings, CIBC raised its quarterly dividend by 2 cents to 98 cents a share. However, there are questions as to what the raise means.
"We are struggling with the messaging implied by a 2-per-cent increase in the dividend when earnings came in more than 8 per cent above consensus estimates," Barclays Capital analyst John Aiken wrote in a note to clients. "The question becomes: Does a lack of a greater increase imply concern about earnings sustainability/growth or is it simply ... conservatism from management?"
Investors are generally cautious about CIBC's fortunes because the bank is so closely tied to its domestic market, with more than 70 per cent of its earnings typically stemming from retail and business banking within Canada. Although there are fears the Canadian exposure will hurt the bank as domestic lending cools, CIBC has yet to suffer, with revenues climbing higher and provisions for credit losses falling.
Lately, CIBC has made it clear it is keen on expanding in wealth management to diversify its operations, with a goal of earning 15 per cent of its total profit from this arm.