Neither a jittery Canadian housing market nor a suddenly wary U.S. business climate could dampen second-quarter performance at three of Canada's largest banks, but both issues will continue to be key concerns in the coming months.
Toronto-Dominion Bank, Royal Bank of Canada and Canadian Imperial Bank of Commerce all outstripped analysts' profit forecasts for the quarter that ended April 30, a day after Bank of Montreal narrowly missed consensus estimates. The better-than-expected results were driven by solid contributions from all divisions, particularly capital markets, and by lower credit losses that let banks earmark less money to absorb bad loans.
The six biggest banks' stock prices had been in retreat since March, plagued by lingering worries about trouble in the alternative mortgage market and allegations about aggressive sales tactics. But on Thursday, executives from the three banks tried to send soothing signals to investors. Even as concerns about Canadian housing – particularly in the Greater Toronto Area – reach a fever pitch, and governments unveil extra measures to try to cool house-price increases, the banks' mortgage portfolios showed no noticeable weaknesses.
"While we recognize some of the concerns in the market, we remain confident in the Canadian economy, the strength of our mortgage book and our prudent credit adjudication processes," RBC chief executive officer Dave McKay told analysts in remarks echoed by his peers at other banks.
In an interview, the bank's chief financial officer, Rod Bolger, added that RBC's mortgage portfolio remains healthy "even in markets where there's been some increased unemployment, such as Alberta."
A 22-per-cent bump in TD's profit stood out among the day's results – the bank, which is Canada's largest by assets, earned $2.5-billion in the quarter, or $1.31 a share, up from $1.07 a year earlier.
RBC's profit rose 9 per cent to $2.8-billion or $1.85 a share, and not to be outdone, CIBC pushed profit 11.5 per cent higher to $1.05-billion or $2.59 a share.
"Over all, it was a solid quarter across most businesses and in both Canada and the United States," Robert Sedran, an analyst at CIBC World Markets Inc., said in a research note about RBC's results.
One common factor in each profit beat was diminishing provisions for credit losses, or PCLs – the sums banks set aside to cover soured loans – compared with last year. RBC's provisions of $302-million were $158-million lower than last year, while TD's fell by $84-million to $500-million. Recoveries in the oil and gas sector, which suffered deeply from rock-bottom oil prices in 2016, are a major factor. But provisions needed for a rainy day can be volatile from quarter to quarter.
"It will be interesting to hear how sustainable this level of PCLs is," Darko Mihelic, an analyst at RBC Dominion Securities Inc., said in a research note about TD's results.
The suite of strong results extended into the U.S. divisions at TD and RBC, even as uncertainty over U.S. policies – from taxes to infrastructure spending and deregulation – has tempered the confidence that created a more welcoming business climate south of the border. Profit in TD's U.S. retail-banking division rose 18 per cent compared with last year, to $845-million, thanks to faster growth in loans and deposits, among other factors.
RBC said City National Bank – the Los Angeles-based lender it acquired for $5.4-billion (U.S.) in 2015 – boosted its profit by 12 per cent in the second quarter, benefiting from higher U.S. interest rates.
"Markets are definitely showing some more downdrafts since the postelection euphoria. And the U.S. credit demand has softened a little bit. But I can tell you it's very volatile and it comes and goes very quickly," Riaz Ahmed, chief financial officer at TD, said in an interview. "The overall situation is a little bit uncertain, but on the ground level, we continue to see a good level of activity."
In short order, CIBC is hoping to tap into stronger U.S. growth as it awaits final approvals on its $4.9-billion takeover of Chicago-based PrivateBancorp Inc. The deal won shareholder approval earlier this month, but a divergence in the two banks' share prices forced CIBC to sweeten its offer twice in the span of five weeks.
"You can't time the market and it's the way things turned out, but this is a long-term view for us," CIBC's chief financial officer Kevin Glass said in an interview. "It's an important strategic move, so we are committed to that."
TD also announced it has "largely completed" an internal review the bank launched earlier this year when it was dogged by allegations of aggressive and improper sales practices. The bank did not disclose details of the results, but CEO Bharat Masrani said he continues to believe there is no "widespread problem" with unethical behaviour in pursuit of sales goals.
"I value the assessment, and there are some ways that we can continue to improve," he said.