TD, CIBC Fall as Record Canada Bank Profits Fail to Impress

Aug 28, 2014 4:21 pm ET

(Updates with closing share prices starting in third paragraph.)

Aug. 28 (Bloomberg) -- Canadian lenders including Toronto- Dominion Bank and Royal Bank of Canada reported record profit in the third quarter -- just not the kind of profit investors wanted.

The country’s six largest lenders posted combined net income of C$9.32 billion ($8.6 billion) in the period ending July 31, with growth fueled largely by gains in investment banking and wealth management. That surpassed the previous high of C$8.49 billion in the first quarter.

Bank stocks declined even with the record bottom-line results. The Standard & Poor’s/TSX index of eight Canadian lenders slipped 0.7 percent, with Canadian Imperial Bank of Commerce dropping the most among the six largest banks.

“The mix of business is a factor for the market reaction,” said Ian Nakamoto, director of research at MacDougall, MacDougall and MacTier Inc. “Investors are less willing to pay for capital markets activity earnings as opposed to the more stable consumer and commercial banking.”

Toronto-Dominion, Canada’s largest lender by assets, said today that profit for the period ended July 31 soared 38 percent to C$2.11 billion, while CIBC, the fifth-biggest bank, posted 4.9 percent profit growth to C$921 million. Both banks benefited from higher earnings in investment banking and wealth management and lower provisions for credit losses.

Toronto-Dominion joined Royal Bank of Canada, Bank of Montreal and Bank of Nova Scotia in reporting record quarterly profit, while National Bank of Canada also reported an increase in earnings.

‘Earnings’ Driver

“Wealth management and capital markets seem to be the earnings growth driver,” Tom Lewandowski, an analyst with Edward Jones & Co., said in a phone interview from St. Louis. “The risks associated with that is you have more market sensitivity, so that could lead to more earnings volatility if markets turn over.”

Some lenders also benefited by setting aside less money for bad loans. Provisions for credit losses for the six lenders declined to C$1.39 billion, the lowest since 2010, according to data compiled by Bloomberg.

“The Canadian banks have continued to perform very, very strongly,” Toronto-Dominion’s Chief Financial Officer Colleen Johnston said in an interview. “This year, despite a tough operating environment, the results for the banks overall have continued to be good.”

Shares Fall

CIBC fell 2.2 percent in Toronto trading today, while Toronto-Dominion slipped 0.8 percent and Royal Bank declined 0.7 percent. National Bank was the only lender to advance, climbing 2.1 percent.

Canadian banks stocks have surged this year, with all but CIBC hitting record highs. The Canadian banks index is up 13 percent since Dec. 31, outpacing the 2.7 percent increase of the KBW index of 24 U.S. lenders.

Toronto-Dominion said its per-share profit excluding some items was C$1.15 a share, beating the C$1.09 average estimate of 13 analysts surveyed by Bloomberg.

Canadian retail profit, which includes wealth management and insurance, rose 54 percent to C$1.44 billion from a year earlier, when a weather-related insurance loss pared profit. Toronto-Dominion’s December purchase of a credit-card portfolio from CIBC added to earnings.

U.S. retail earnings, which include wealth management and the firm’s stake in discount brokerage TD Ameritrade Holding Corp., rose 9.4 percent to C$561 million, the bank said.

Underwriting, Advisory

The lender’s wholesale unit profit jumped 46 percent to C$216 million from a year earlier on higher investment-banking fees and trading, according to the statement. Underwriting and advisory fees advanced to C$148 million from C$89 million, while trading income gained 14 percent to C$325 million.

CIBC’s profit excluding some items was C$2.23 a share, beating the C$2.21 average estimate of 16 analysts surveyed by Bloomberg News.

Investment banking, wealth management and lower provisions for credit losses helped counter the loss of half of CIBC’s popular Aerogold Visa credit card portfolio. Retail and business-banking earnings slid 3.8 percent to C$589 million from a year earlier, pulled down by lower credit-card revenue after the Aerogold Visa sale to Toronto-Dominion.

“Retail banking is likely to see little change from the recent modest growth rates in demand for household and mortgage credit given existing levels of debt and the past few years’ policy changes in mortgages,” CIBC said in its outlook for the rest of the year. “Demand for business credit should continue to grow at a healthy pace.”

Wealth Management

Wealth-management profit rose 19 percent to C$121 million, lifted by higher assets under management from improving markets and contributions from its January takeover of Atlantic Trust Private Wealth Management.

CIBC’s investment-banking business posted earnings of C$282 million, up 33 percent from a year earlier. Underwriting and advisory fees surged to C$150 million from C$98 million.

Losses widened to C$71 million at CIBC’s corporate division, which includes Caribbean banking, from a C$48 million loss a year earlier.

CIBC said it plans to buy back as many as 8 million shares, or as much as 2 percent of its stock, in the next 12 months.