Canada’s biggest banks are actually five for five this earnings season after Royal Bank of Canada, Toronto-Dominion Bank and Canadian Imperial Bank of Commerce all reported second-quarter earnings that topped?estimates?on Thursday. However the beats were?largely on the back of growth in the notoriously volatile capital markets business, there are signs the banks are girding for additional economic uncertainty.
Indeed, tepid core retail numbers, rising loan loss provisions an additional major restructuring charge in as many days has some investors back on their own heels curious about the future earning prospects for that group.
\”Results were slightly much better than I expected,\” said Erik Oja, equity analyst at S&P Capital IQ. \”But growth minute rates are getting pretty low which explains why bank shares are down.\”
Shares in?all of?the so-called \”Big 6\” banks fell sooner or later during Thursday\’s trading session. The biggest loser was Toronto-Dominion – which closed 1.09 per cent lower, followed by Bank of Montreal which dropped 1.01 per cent.
TD, the country\’ second-largest bank by market capitalization, said adjusted earnings for the three months ended April 30 were $1.14 per share, compared to the average analyst estimate of $1.11 per share.
BMO profit beats estimates – but analysts see shortcomings in core Canadian divisionTD Bank beats forecasts despite profit drop on major restructuring charge
The earnings beat was bolstered by strong capital markets revenue but weighed down by ongoing challenges in retail banking, together with a rise in loan loss provisions in Canada in the previous quarter along with a 9 basis point drop in margins south from the border.
The results were also tempered with a $228 million after-tax restructuring charge associated with “operational efficiencies” the bank plans to create. It\’s the second such charge taken now after Bank of Montreal booked?$106 million on Wednesday.
Colleen Johnston, TD’s chief financial officer, said the restructuring is essential in order to better compete in a challenging operating environment and include an undisclosed number of job cuts in Canada and also the U.S. as well as branch consolidation and company office closures.
“The restructuring charges are about controlling our rate of expense growth to help us also become fitter and faster making it easier for people to do business with us and easier for our employees to get things done,” she said inside a phone interview.
Shares in Royal Bank and CIBC also traded lower for much of the day after topping analyst estimates on Thursday.
RBC, the largest bank in the country by market cap, was relatively flat at market close, after reporting adjusted earnings of $1.63 per share, again mostly because of strength in capital markets as its domestic loan growth continues to slow.
“Given Royal’s ever-increasing contact with U.S. capital markets, we do not believe that it faces the same relative headwinds as its more domestically focused peers under our expectation of declining activity north from the border,” said John Aiken, analyst at Barclays Capital Markets, in a note to clients.
“However, capital markets revenues are inherently volatile and that we anticipate that, on balance, lower revenues in the second half are more likely.”
CIBC’s results, meanwhile, were almost a spitting image, beating estimates around the back of capital markets strength that was offset by retail weakness marked with a large rise in loan loss provisions and $25 million price of new impaired loans in its oil and gas file.
Still, the financial institution ended the day slightly higher, aided by a surprise increase in its quarterly dividend to $1.09 per share from $1.06 previously.
“We are admittedly impressed with the bank’s Q2 results and are fans of the strategy to slowly move the payout ratio closer to 50%,” Aiken said.
In short, second-quarter bank results have been impressive on the surface, although not good enough for investors to breathe a sigh of relief.
Net interest margins are low but fairly stable there isn’t any deterioration in credit quality despite some increases in loan loss provisions, said Craig Ellis, a portfolio manager at Bellwether Investment Management in Oakville, Ont.
At the same time frame, capital markets performance remains unpredictable moving forward and the operating environment continues to be a challenge specifically in Canada where rates of interest are not expected to rise any time soon and weaker oil prices are a potential headwind for that economy.
“We don’t think banks are a problem, but it’s difficult to see meaningful earnings growth beyond mid-single digits,” Ellis said.
“I don’t see anyone looking at these numbers saying, ‘I gotta get free from the Canadian banks now,’ however the flip side is, I don’t think anybody is going to say, ‘Wow, I need to increase my exposure here.\’”