Toronto-Dominion Bank and Canadian Imperial Bank of Commerce reported higher quarterly profits and raised their dividends, offering a shot of good news in a sector that has been rattled by falling crude oil prices and a weak economy.
However, both banks set aside more money to cover bad loans, continuing a trend that has defined much of the reporting season for the big banks this week amid concerns that Canada's depressed energy sector will have trouble meeting its debt obligations.
"We continue to monitor our oil and gas exposure closely and remain confident that any losses will be manageable, given the small size of this exposure relative to our balance sheet," Bharat Masrani, TD's chief executive officer, said in a conference call with analysts on Thursday.
TD set aside $642-million to cover bad loans, up 77 per cent from last year. The provisions represent 0.45 per cent of TD's total loans, a ratio that is considerably higher than its peers but can be largely attributed to the bank's U.S. operations due to the stronger U.S. dollar, larger credit card portfolio and regulations for handling existing customers who no longer qualify for home equity lines of credit.
Within Canada, impairments tied to the oil and gas sector rose to $65-million, up from $36-million last quarter.
CIBC set aside $262-million to cover bad loans, before adjustments, up 40 per cent from last year.
It said that its exposure to relatively safe investment-grade companies fell to 74 per cent from 78 per cent, reflecting a rash of recent downgrades to energy companies by credit-rating agencies.
The bank said that it added nine names to its oil and gas watch list, with one becoming impaired. It added that delinquencies tied to credit cards and unsecured lending are up after Alberta's unemployment rate rose above the national average for the first time in three decades.
"I'd say that our portfolios continued to perform as expected and in the event that oil prices remain at these low levels, we would expect to see continued negative migration in the corporate space and increased losses in our retail accounts," said Laura Dottori-Attanasio, CIBC's chief risk officer.
Larger loan losses come at a time when the big banks are struggling to find opportunities to increase their profits because of low interest rates and a weak domestic economy – although TD and CIBC delivered results that showed decent growth.
TD said that its fiscal first-quarter profit rose to more than $2.2-billion, up from about $2.1-billion a year ago. After making some adjustments, profit rose 6 per cent.
Profit from TD's Canadian retail operations rose 4 per cent, to $1.5-billion. Its U.S. retail operations reported a profit of $771-million, up 20 per cent – but just 3 per cent in U.S. dollars.
"All the fundamentals in the U.S. are working exactly as they should," Riaz Ahmed, TD's chief financial officer, said in an interview. "We've grown earnings in a young franchise that has a lot of opportunity."
TD raised its quarterly dividend to 55 cents a share, up 4 cents.
CIBC said that its first-quarter profit rose to $982-million, up from $923-million a year ago. After making some adjustments, profit rose 7.6 per cent.
Profit from retail and business banking rose 6 per cent, to $684-million, while profit from capital markets fell 10 per cent because of lower underwriting revenue.
CIBC raised its quarterly dividend to $1.18 a share, up 3 cents, marking its sixth-consecutive quarterly increase.
"While our first-quarter results were strong, we're very mindful of the difficult business and economic climate that we're in – and in addition to weak energy prices, there's broad investor unease about the global economy," Victor Dodig, CIBC's CEO, said in a conference call.
CIBC's sale of its minority stake in American Century Investments late last year, for about $1-billion (U.S.), is expected to drive the lender's capital levels considerably higher. While that makes an acquisition a possibility, Mr. Dodig suggested that he is in no rush to make a deal.
"I think the market environment that we're in today calls for having that capital buffer," he said, adding that money could be directed toward further dividend hikes and share buybacks.