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Canada’s big banks continue to blow past analysts’ forecasts, but most expect a tougher year ahead.

Moe Doiron/The Globe and Mail

Canada's biggest banks managed to report blockbuster profits in a quarter marked by low interest rates and fierce competition for loans. No one, including some bank executives, believes a repeat performance will be easy.

Four of the Big Six banks – Bank of Montreal, National Bank of Canada, Canadian Imperial Bank of Commerce and Royal Bank of Canada – reported their best-ever quarterly profits in the three months ended July 31, and those that didn't posted record results for individual units. All six beat analyst expectations.

The stellar earnings squelched concern that Canada's cooler housing market and high household debt levels would weigh on profits. "We are continuing to see loan growth in Canada at probably a bit of a higher pace than many would have expected," Barclays Capital analyst John Aiken said in an interview.

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Expense control taken by banks to contend with a tougher lending environment has also helped. "The banks are doing an exceptionally good job of managing their costs so those provide some pretty significant leverage to the bottom line with revenues come in stronger than what had been expected," Mr. Aiken said.

For those reasons, the Big Six blew past earnings expectations in their most recent quarter, catching many analysts off guard, including analyst Brad Smith at Stonecap Securities, whose earnings growth forecast was roughly double consensus. Mr. Smith noted that expectations were "remarkably low" this quarter, which has been a recurring theme for more than a year.

Robust results instilled enough confidence in bank executives to convince them to increase dividends. Three banks boosted their payouts this quarter.

However, the tough interest rate environment and slower economic growth in 2014 will weigh on the banks' bottom lines, making record profits a tougher goal.

The fears of a Canadian cool down also haven't completely subsided. "At some point Canadian households are going to have to de-leverage and that does extrapolate into significantly lower levels of consumer lending growth for the banks," Mr. Aiken said. "Considering the importance that the retail banking platforms have for each of their earnings it does create a fairly significant headwind."

"We still see 2014 as a tough revenue year," Ed Clark, TD's chief executive officer, said on a conference call. For that reason, the bank has opted to crack down further on expenses and in the coming year TD will assess whether to close some bank branches.

RBC made similar comments. "We are managing in a very cautious manner because of the economic uncertainty," chief financial officer Janice Fukakusa said in an interview. However, she added that RBC has "confidence in the earnings," a key reason the bank boosted its dividend payout by 12 per cent in 2013, in line with its earnings bump in the current fiscal year.

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Because the banks are expanding in different countries and in different business lines, the potential threats to earnings differ for each institution. Scotiabank is investing in Latin America while RBC beefs up its global capital markets arm in the U.S. and the U.K. At TD, for instance, management is eyeing the slowdown of mortgage growth south of the U.S. border after bond yields began tracking higher in the spring.

While overall earnings were solid, there were some notable blips. TD's insurance unit struggled this quarter and the bank pre-announced in July that it would set aside $292-million in after-tax reserves stemming from higher costs of settling personal injury automobile claims in Ontario.

That provision comes on top of a $125-million after-tax charge related to insuring homes affected by floods in southern Alberta and the Greater Toronto Area this summer, as well as a $48-million loss on its real estate loan portfolio this quarter, related to the Alberta floods.

RBC also endured a tough trading quarter in the U.S., where the sudden rise in bond yields surprised its municipal bond desk. The market selloff RBC experienced over a five-day period was "the worst we've seen in 30 years," said Mark Standish, co-CEO of the bank's capital markets arm.


Bank earnings roundup:

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It was a good week for Canadian banks – and Canadian bank investors.

Royal Bank of Canada posted a record third-quarter profit of $2.3-billion and net income of $1.52 per share. Analysts had expected only $1.37 per share. The bank's profits for the first three quarters of 2013 were 12-per-cent higher than the same period in 2012. As was widely expected, RBC raised its quarterly dividend by 6 per cent, to 67 cents, which chief executive officer Gord Nixon said "reflects the confidence we have in our ability to continue to generate solid earnings growth."

Toronto-Dominion Bank followed suit with a $1.53-billion profit, beating analyst expectations with earnings of $1.58 per share. But profit dropped 11 per cent from the same quarter in 2012, when TD had posted record earnings. The bank was pulled back by its insurance unit, which set aside $292-million in after-tax reserves to cover higher costs of settling personal injury automobile claims in Ontario, and another $125-million in after-tax reserves for charges related to insuring homes in Alberta and the Toronto area damaged by floods this summer.

Canadian Imperial Bank of Commerce pulled in a $890-million profit, the bank's best ever and an 8-per-cent jump from the same period last year. After removing one-time items, CIBC made $943-million, or $2.29 per share, handily beating analyst expectations of $2.13 per share. While CIBC left its dividend unchanged, it announced plans to buy back up to eight million shares. Talks between CIBC and TD on how to divide Aeroplan credit cards are ongoing, but CIBC did not report any progress.

Earnings reports were kicked off earlier this week when the Bank of Montreal posted a 17-per-cent jump in profit, with record quarterly earnings of $1.14-billion, or $1.68 per share, beating analysts' expectations of $1.53 per share.

Bank of Nova Scotia made $1.77-billion in the third quarter, with an adjusted earnings per share of $1.37 per share, narrowly beating analysts' expectations of $1.31 per share. Scotiabank raised its dividend to 62 cents per share, up from 60 cents.

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On Wednesday, National Bank of Canada reported a record profit of $419-million or $2.39 a share, up 12 per cent from the year before.

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