Rising earnings from U.S. banking operations played a major part in boosting fourth-quarter profits at two of Canada's largest banks – but investors rewarded one lender and punished the other.
While Canadian Imperial Bank of Commerce is suddenly surfing a wave of optimism after turning in much stronger results, Toronto-Dominion Bank was a victim of lofty expectations after its own outsized success in the prior quarter, despite reporting good growth.
Profit was up 25 per cent at CIBC and 18 per cent at TD, compared with a year earlier, though one-time items inflated both numbers. After adjustments, the banks earned 21 per cent and 11 per cent more, respectively.
Both banks' American arms returned to the forefront after a third fiscal quarter when robust Canadian economic growth drove earnings and stole the spotlight. CIBC recorded the first full quarter of input from its June acquisition of Chicago-based PrivateBancorp Inc. for $5-billion (U.S.), and profit from the newly created U.S. commercial-banking and wealth-management division rose more than fourfold, to $107-million (Canadian). Over the same period, TD's well-established U.S. retail banking arm added loans and deposits to push profit 11 per cent higher, to $776-million.
After TD reported stellar third-quarter results in August, "there were higher expectations for TD," said Scott Chan, an analyst at Canaccord Genuity Group Inc., in a research note. By Thursday's close on the Toronto Stock Exchange, investors had pushed CIBC's share price 2.9 per cent higher, while TD's stock had pulled back by 2.4 per cent.
Yet, executives at both banks struck a confident tone as they enter a new fiscal year. "Overall, 2017 was a strong year for TD across the board," said chief executive officer Bharat Masrani, on a conference call with analysts. "And we expect to carry that momentum into 2018."
Rising U.S. interest rates provided both banks with an important lift, helping to expand the margins they earn on loans. The former PrivateBancorp, which has been renamed CIBC Bank USA, is particularly sensitive with 97 per cent of its loans carrying variable pricing. "So clearly as rates rise it has an impact," said Larry Richman, head of CIBC's U.S. operations. With fourth-quarter profit of $57-million, the bank reported "one of the best quarters we've ever had."
"[PrivateBancorp's] performance was much better compared to what we saw during [the third fiscal quarter of 2017]," said Gabriel Dechaine, an analyst at National Bank Financial Inc.
The Bank of Canada has also hiked interest rates twice this year, and early signs of margin expansion are beginning to show in domestic returns. TD's Canadian retail banking arm increased its profit by 11 per cent to $1.7-billion as revenue grew and the bank continued to attack costs.
At CIBC, profit in Canadian retail banking declined by $8-million in absolute terms, to $551-million. But after adjusting for one-time items, including $98-million in fees and charges incurred from the bank's split with President's Choice Financial and the launch of direct banking brand Simplii, profit also rose 11 per cent to $623-million.
In the fourth quarter, CIBC's continued to grow its mortgage portfolio faster than its peers, with residential loans up 10.6 per cent from a year earlier. But a new mortgage stress test coming into force on Jan. 1 will make it more difficult for some borrowers to qualify for loans, and that has banks bracing for a slowdown in the housing market. CIBC's models predict that it could originate 10 per cent to 12 per cent fewer new loans under the tougher standard, but that doesn't account for applicants who might accept a smaller loan or make a larger down payment to clear the higher threshold.
"Ideally, [the decline will] be somewhat less, but I've got to stress: It'll be driven by our clients' needs," Kevin Glass, CIBC's chief financial officer, said in an interview.
TD chief financial officer Riaz Ahmed declined to say how much the new rules might affect his bank's mortgage business, but added: "To the extent that that reduces activity somewhat, I think we remain comfortable with that."
Provisions for credit losses – or the money banks earmark to cover bad loans – edged higher at both banks. TD attributed a 5.5-per-cent increase to "seasonal trends" in its credit-card and auto-loan portfolios as the holiday season approaches, while CIBC's provisions climbed 3 per cent higher.
"Right now, things are stable. The economy's doing well, unemployment is low, those are the big drivers," Mr. Glass said. "There's nothing on the horizon that would give us any indication that there's a problem."
Both banks also suffered from weaker trading revenue due to quiet capital markets. CIBC endured a 13-per-cent dip in wholesale banking profit due partly to lower equity- and commodities-trading revenue, while TD took comfort in limiting declines in its own capital-markets earnings to 3 per cent, compared with a year earlier.
For the fourth quarter, which ended Oct. 31, TD earned $2.7-billion, or $1.42 per share, compared with $2.3-billion, or $1.20, a year ago.
Adjusted to account for one-time items – including charges related to the $1.3-billion (U.S.) acquisition of Scottrade Financial Services Inc.'s bank operations – Canada's largest bank by assets earned $1.36 (Canadian) a share, shy of the $1.38 analysts predicted when polled by Bloomberg LP.
Fourth-quarter profit at CIBC, the country's fifth-largest bank, reached $1.16-billion, or $2.59 a share, up from $931-million, or $2.32 a share, in the same period last year.
Excluding one-time items, which included $46-million in costs from acquiring and integrating PrivateBancorp and wealth manager Geneva Advisors, CIBC earned $2.81 a share, whereas analysts had predicted only $2.61 a share.
For the full year, TD's profit rose 18 per cent to $10.5-billion, while CIBC earned $4.7-billion, which was nearly 10 per cent more than in 2016.