The latest batch of quarterly earnings from Canada's biggest banks exceeded most expectations, but similar profits won't seem nearly so spectacular starting next quarter.
Canadian Imperial Bank of Commerce was the last of the major banks to report second-quarter results, posting a 3 per cent growth in core earnings on Thursday. Taking all of the big six banks into account, the industry's profit growth in the quarter averaged 10 per cent year over year, with five of the lenders handily beating earnings estimates.
However, more recent comparisons aren't nearly as flattering. Core profits across the banks grew by an average of just 0.2 per cent quarter over quarter. Five of the six lenders averaged core profit growth of just 1.5 per cent in the first six months of fiscal 2014, relative to the final six months of the previous fiscal year. Toronto-Dominion Bank was the exception.
Such a short-term analysis isn't as compelling because the banks went on a record earnings run starting mid-way through 2013. Last August, four reported their best-ever quarterly profits, and those that didn't posted record results for individual units. All six beat analyst expectations that quarter.
Despite the second quarter's strong results, some banks have cautioned investors that they simply can't sit back and rake in profits. Toronto-Dominion chief executive Ed Clark stressed during a recent conference call with analysts that even though his bank had an outstanding quarter, "this is a tough, difficult environment."
Bank of Nova Scotia CEO Brian Porter said his organization has a lot of work to do in cutting costs in its international banking arm. "We continue to focus on streamlining our operating model and maximizing the efficiency of our operations across our footprint to reduce structural costs," he said on the bank's quarterly conference call with analysts.
The banks have faced questions about their ability to grow for more than two years and so far they have defied the naysayers. The lenders are also well capitalized, with five of the big six reporting common equity Tier 1 capital ratios north of 9 per cent – well above the regulated 8 per cent minimum.
CIBC hiked its quarterly dividend by 2 cents on Thursday to $1 and the bank's second-quarter earnings beat analyst expectations, but the total profit was mired by one-time items.
The bank's core earnings climbed 3 per cent from the year prior, however, the results were difficult to analyze. CIBC's domestic personal and commercial banking arm has seen some major charges of late, such as the sale of half its Aeroplan credit card portfolio. The bank also reported a $420-million goodwill writedown on its Caribbean arm, as well as $123-million in additional loan losses in the region.
CIBC's total profit amounted to $306-million, or 73 cents per share, down significantly from $862-million one year ago. After stripping out one-time items, which included the significant non-cash Caribbean charge, CIBC made $887-million, or $2.17 per share.
Of all the major banks, CIBC is now the best capitalized, sporting a Tier 1 common equity ratio of 10 per cent. "For a bank that has drastically reduced its risk profile, this is an exceptionally high level and, without any significant change in its stance to returning capital to shareholders, will likely continue to fuel speculation regarding acquisitions," said Barclays Capital analyst John Aiken.
Chief executive officer Gerry McCaughey is particularly keen on expanding the wealth management division in the near future, with plans to have the unit contribute 15 per cent or more of total earnings. Wealth earnings amounted to 13 per cent of core profit during the second quarter, and on a conference call Thursday, Mr. McCaughey said his profit target will likely be achieved through a mix of organic growth and acquisitions. CIBC is particularly seen on expanding in the United States.