Consumer Spending Fuels Bank Profitability Amid Ongoing Trade Uncertainties
Canada’s biggest banks all posted higher second-quarter profits that topped analysts’ expectations, with their chief executives pointing to the resilience of consumers and businesses even as geopolitical and trade uncertainty weigh on segments of the economy.
Royal Bank of Canada RY-T chief executive Dave McKay said that even amid slower real estate and commercial activity, he is “impressed” with the resilience of the Canadian economy. Even so, he recommended keeping “eyes wide open” to the impacts of tariffs on specific industry sectors.
Last fall, talks broke down between Ottawa and Washington about lowering Section 232 tariffs on Canadian steel and aluminum.
“There is a little bit of caution there that we’re not through Section 232, but I still come back to: This is an important trade deal for both countries. It’s pursuing a track that’s not dissimilar to the track that happened the last time,” Mr. McKay said about the review of the United States-Mexico-Canada Agreement on trade during a conference call with analysts.
“I’m optimistic we’ll get to something that’s good for both countries, so I’m impressed by the resilience, notwithstanding that Section 232 has impacted the Canadian economy and created some weakness there.”
The banking sector is also facing rising competition in its home market. Canada’s banking regulator is streamlining the path to becoming a bank to allow more players into the system, and fintechs are ramping up efforts to take market share from the six largest lenders.
Mr. McKay said RBC has the capability to quickly build technology to match platforms offered by innovators. As fraud and cybersecurity concerns mount, clients will be more likely to trust an established bank with their savings and investments, he added.
“Customers are going to be judicious in trust, brand, scale, capability and price,” Mr. McKay said.
“We feel fully confident in matching any of the tools out there.”
Toronto-Dominion Bank TD-T is betting on its Canadian businesses to prop up its growth ambitions as it cuts costs and remediates its anti-money-laundering failures in the U.S. The increased focus on the domestic unit comes as competition for deposits ramps up.
TD head of Canadian personal banking Sona Mehta said the bank is not relying on competing on pricing to bolster growth in its personal banking business.
“In the market, we definitely did see, in the second quarter particularly, competitive pricing set in,” Ms. Mehta said.
“We’re leaning in, competing on speed and specialization rather than price.”
Canadian Imperial Bank of Commerce’s CM-T share price slumped Thursday, falling by 5.4 per cent in Toronto. The bank’s stock has outperformed most of its peers in the past year, climbing 60 per cent.
National Bank of Canada analyst Gabriel Dechaine attributed the drop in part to the bank’s profit margin on lending, which rose 17 basis points year-over-year, but fell one basis point from the previous quarter, tempering the improvement the bank has posted in recent years. (A basis point is one-100th of a percentage point.)
While CIBC outperformed peers, it did not surpass expectations for profit margins on lending, he said. Mr. Dechaine also expects margins to flatten amid rising competition for mortgages and deposits.
CIBC chief financial officer Robert Sedran said the bank has reported strong margin progression in recent quarters and the bank is confident in its strategy.
“Competition in Canada is always fairly intense,” Mr. Sedran said in an interview.
“When we think about our strategy, we’re doing what’s right by our clients, and we’re not competing in specific areas or specific products with any attempt to gain market share. We are looking to deepen our relationships with our clients, and we will continue to grow that client franchise.”
RBC, TD and CIBC each posted stronger earnings that topped analysts’ expectations. On Wednesday, Bank of Nova Scotia BNS-T , Bank of Montreal BMO-T and National Bank of Canada NA-T also reported higher profits that beat estimates.
Analysts had expected capital markets activity to continue to bolster profits across the sector while loan growth slows.
RBC’s capital markets unit posted earnings of $1.48-billion, an increase of 23 per cent from a year earlier, driven by higher revenue in global markets and corporate and investment banking. Head of capital markets Derek Neldner said he expects elevated trading and mergers and acquisitions activity to continue as clients navigate heightened uncertainty.
“In terms of the near-term visibility of our pipelines that we see, we continue to be very encouraged by the level of activity, and so that certainly will carry us through a number of quarters,” Mr. Neldner said.
“We think a lot of those trends in terms of the environment we’re in over the next few years stay intact. They’ll ebb and flow a little bit quarter to quarter, but the volatility and the level of uncertainty that we’re seeing from a variety of different factors probably persists.”
The threat of an economic downturn has pressured consumers and businesses, prompting banks to earmark more money for potential loan defaults in recent years. Some lenders are starting to moderate the amount of money being set aside.
TD set aside $1-billion in provisions for credit losses – the funds banks set aside to cover loans that may default. That was lower than analysts anticipated and less than the bank reserved in the same quarter last year.
Economic uncertainty, inflation and higher interest rates have weighed on the housing market and business sentiment, tempering demand for lending, in particular in real estate secured lending (RESL).
“The consumer continues to be resilient; however, when you look at RESL, the rates are a little bit higher than a few months ago, and that is putting pressure on volume for RESL,” TD chief financial officer Kelvin Tran said in an interview.
“On the business side, anecdotally, when you talk to clients over time, they say, ‘Well, I’ve been pausing for some time now and I’m ready to invest.’ So, there’s confidence in the outlook of Canada.”
CIBC also said Thursday that it struck a deal to sell its stake in CIBC Caribbean to Bermuda-based The Bank of N.T. Butterfield & Son for US$1.6-billion.
“The transaction enables us to allocate capital towards our highest strategic growth priorities,” CIBC CEO Harry Culham said.
With a report from James Bradshaw
This article was first reported by The Globe and Mail
