Slow growth, rising expenses forcing banks into cost-cutting action

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Cost control has become a major concern for Canadian banks as the country's largest lenders grapple with slower growth and soaring expenses.

Canadian Imperial Bank of Commerce and Toronto-Dominion Bank, both of which released fourth-quarter earnings Thursday, reported expense growth that outpaces revenues, while Bank of Montreal reported the same trend earlier in the week. The banks' profits came out on the same day that the S&P/TSX bank index fell 2.5 per cent.

At TD Bank, management said it is ready to take action to protect the bottom line. Chief executive officer Bharat Masrani stressed the need to "increase efficiency and streamline our cost base" during a conference call Thursday. Such language usually portends job cuts and restructurings.

Bank of Nova Scotia management used similar words in April, when the lender's retail banking head stressed the need for "expense management" and "operational excellence." Six months later, it announced to cut its work force by 1,500 people, including two regional heads.

However, some banks are less concerned – at least for the time being. Executives at CIBC have not expressed any worries because elevated expenses have largely tracked the bank's investment in its retail operations. Whether CIBC acts swiftly to contain costs will depend on how much additional revenue the revamp generates.

TD is particularly keen to crack down on expenses. Mr. Masrani has raised renewed concerns about the bank's short-term growth prospects.

TD management warned about a tough banking landscape at the start of fiscal 2014, but changed its tune midway through the year once capital markets and wealth management earnings caught fire.

Mr. Masrani is now rehashing the old language, going so far as to say on Thursday that it will be hard for TD to meet its earnings growth targets next year. "We continue to aspire to deliver 7 per cent to 10 per cent [earnings per share] growth over the medium term. In the current environment, it is difficult to see how we will get into that range next year," he said on the conference call.

The warning came just one day after Royal Bank of Canada expressed confidence in delivering 7-per-cent annual earnings growth.

The recent cost crackdown comes as Canada's largest banks are reporting enormous profits. TD made $7.9-billion in fiscal 2014, which ended on Oct. 31. However bank executives have long stressed the need to balance cost control with creating "shareholder value." CIBC's profit slipped 1.7 per cent in the fourth quarter from a year earlier to $811-million, largely because of weaker capital markets earnings, but overall earnings were in line with analysts' expectations. The bank raised its quarterly dividend by 3 cents to $1.03 a share and also appointed former cabinet minister John Manley as chairman of its board, replacing the outgoing Charles Sirois.

CIBC's full-year profit totalled $3.2-billion, down 4 per cent from 2013, after incurring a substantial charge in the second quarter to write down the value of its Caribbean business. The bank also incurred a $112-million one-time charge in the fourth quarter to revalue its derivatives portfolio – something other banks have also reported. CIBC's shares fell 3.4 per cent to $103.52.

CIBC is looking to expand its wealth management footprint, particularly in the U.S. On a conference call Thursday, chief executive officer Victor Dodig said the bank is currently assessing deals worth between $1-billion and $2-billion.

In Canada, the bank is investing heavily in its retail banking systems, such as one that will make it easier to cross-sell products to clients. These expenses are expected to make it difficult to realize profit growth in the near future.

TD's strong earnings momentum cooled in the fourth quarter, with profit falling short of analyst expectations. However, TD still made $1.7-billion, 8 per cent more than the same period in 2013. TD's stock fell 5.1 per cent to $54.03.

U.S. retail earnings climbed 6 per cent to $509-million during the quarter, but showed signs of cooling. TD has hoped for better growth from its U.S. retail operations, but its latest quarterly report noted that margins are falling south of the border.

Looking forward, chief financial officer Colleen Johnston said in an interview that "a number of the macro challenges will remain into 2015," including low interest rates and stiff regulation that has increased compliance costs.

Should the U.S. economy continue to gather steam, however, TD is one of the best-positioned Canadian banks because of its big investments to expand its retail business south of the border.